Health Insurers Hedge Their Bets

Managed-care providers UnitedHealth and Aetna, eyeing the specter of health-care reform, are diversifying into new markets and product lines

by Wendy Diller From Standard & Poor's Equity Research

For managed-care organizations (MCOs), which footed the bill for roughly 34% of U.S. health care spending in 2007, health-care reform presents uncertainty and opportunity. Proposals now being debated in Washington and the different states aren't affecting near-term business, says Phillip Seligman, a Standard & Poor's equity analyst who follows MCOs. Nor are MCOs currently incorporating reform proposals into their guidance for 2008 or beyond.

Nevertheless, payers are expecting at least incremental changes to the system, given the level of concerns about spiraling health-care costs and growing lack of access to affordable health insurance. On this, a panel of Wall Street analysts concurred at a recent conference on health-care reform sponsored by the Center for Studying Health System Change (CSHSC).

Because they aren't sure how reforms will play out, MCOs are hedging their bets by diversifying into new markets and product lines that offer a wide range of coverage and pricing options. Many of these products are designed to appeal to price-sensitive small-group and individual buyers. MCOs traditionally considered these to be modest niche markets at best, but now view them as important for future growth, particularly if reforms initially focus on getting coverage for the uninsured, as is currently expected from the political rhetoric surrounding the issue.

Future Uncertain

The outlook for these non-traditional products is uncertain, however. As of the first quarter of 2008, several MCOs—WellPoint (WLP), Health Net (HNT), and others—were struggling to increase enrollment rates in non-traditional businesses. In its second-quarter earnings call, WellPoint said it continued to see slow enrollment through June. Non-traditional products offer a broad range of coverage at varying price points, but are still unaffordable for a large segment of the uninsured. Also, the weak economy has slowed demand for them.

MCOs argue that enrollment will increase when the economy revives. They note that some 20% or more of the 47 million Americans between 18 and 65 who are uninsured are well-off enough to afford coverage. More than 9 million of the uninsured have household incomes of $75,000 or more and could afford individual policies, points out Joseph Zubretsky, chief financial officer of Aetna (AET). A further 11 million are eligible for federal health programs but aren't enrolled in them, he adds.

One determinant is likely to be the November Presidential election. The U.S. system currently revolves around employer-sponsored health insurance, which presumed Democratic Presidential candidate Barack Obama would leave in place. Republican candidate John McCain and his supporters, however, would prefer a stronger emphasis on individual responsibility for purchasing policies, using tax subsidies and penalties to move people into the individual markets and discourage employers from offering insurance. If McCain wins the Presidency, it could be a boon for individual policies.