Insurers’ Profit Drop Means Higher Premiums, More Bad Debt

Profits are down at some health care insurance providers and that’s likely to lead to higher premiums, co-pays and co-insurance costs for employers and consumers renewing health care policies, according to some health care industry analysts.

As a result, health care providers, and hospitals in particular, will see more bad debt expense, as more consumers find themselves uninsured or underinsured and shouldering a larger portion of their medical expenses.

“It’s a lose-lose situation,” said Michael Klozotsky, health care analyst for Kaulkin Ginsberg’s Media Group. “Hospitals realizing the position they are in can either take on tons of bad debt or wind up requiring patients to pay up front and neither is tenable.”

Last week, both WellPoint Inc. and United Health Care reported lower first quarter earnings. The two health care insurers said earnings took a hit from rising health care costs associated with a tough flu season and declining memberships. But profits also were hit by lower interest rates, said Bradley Ellis, a director of insurance at Fitch Ratings Co. 

Ellis said insurance companies have large investments in corporate bonds and treasury securities and the interest paid on those securities has dropped as the Federal Reserve cut interest rates to stimulate the economy. “That will trickle down into earnings,” he said, adding that insurance companies with maturing bonds will have to reinvest at lower rates.

The insurance companies will raise rates to offset their lower profits. “Relative to 2007, consumers may see a slight increase in premiums,” for new policies, Ellis said. “The rate of increase may be higher in 2008 than it was in other years.” Ellis said better performing insurers like Aetna will limit the increases as a competitive measure.

Nonetheless, in a weak economy, the increases will mean more uninsured and under-insured people will be seeking treatment and health care providers will be under more financial pressure, Klozotsky said.  “It’s not that some people won’t pay. Most won’t pay,” Klozotsky said. “They simply will not be able to afford it.”