Why Insurers are Smart to Keep Parts of ObamaCare

By Keith Speights - June 13, 2012 | Tickers: AET, CI, HUM, UNH, WLP | 0 Comments

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Insurance companies are often accused of making decisions that only benefit themselves to the detriment of their customers. That’s probably because insurance companies often do make decisions that only benefit themselves to the detriment of their customers. But now, lo and behold, we have an example of insurers taking a stand that benefits their customers.

UnitedHealth Group (NYSE: UNH), Aetna (NYSE: AET), and Humana (NYSE: HUM) have all committed to keeping parts of the Affordable Care Act (ObamaCare) even if all or part of the law is struck down this month by the Supreme Court. Before you grab a tissue to wipe the tears from your eyes about such warmth and caring, let’s look at these decisions objectively.

I think the insurers are smart to keep parts of ObamaCare in place regardless of what the Supreme Court does. These decisions certainly benefit customers, but they also benefit the insurers. Below is an explanation of what provisions are being kept and why they make sense for the insurance companies and their investors.

Allow children to stay on parents’ coverage until age 26

This decision was an easy one. Many insurance companies already allowed children to stay on their parents’ coverage until their mid-twenties as long as they were students. Some companies required the parents to provide verification of student status, while others did not require this verification.

The reality is that insurers prefer to cover younger members because they tend to be healthier. Whether or not these members are students truly doesn’t matter when it comes to the financial bottom line. Retaining the monthly premiums for young, usually healthy, individuals is a good business move. Also, eliminating the student verification hurdle reduces administrative costs for the insurer by a small amount. Smart move.

Simplified, independent reviews of appeals

Believe it or not, the insurance companies don’t prefer the appeals process to drag out for a long time. I say that as someone who worked for several years on the management team of a health insurance company. We wanted appeals to be handled as quickly and as cost-effectively as possible. I don’t think our company was an exception.

In many states, appeals processes were regulated even before the Affordable Care Act. Access to an independent review of appeals isn’t an entirely new idea. Keeping this provision of ObamaCare didn’t require much added effort for any of the major insurers and makes them appear to be more sensitive. Smart again.

Preventive care without co-pay

There has been a move since the managed care wave first started years ago for insurers to emphasize preventive care. Most already allowed for free annual check-ups with no co-pay.

The decision to cover preventive care including immunizations and screenings without a co-pay will pay off for the insurers. The cost of this preventive care is much less than the cost of paying for medical care that results when a condition isn’t found that could have been found earlier.  This was another smart financial move.

No retroactive cancellations except for fraud /no lifetime maximum

UnitedHealth and Humana went further than Aetna. These two companies announced that they would not practice rescission (retroactive cancellation of a policy) except for fraud and that they would not impose a lifetime maximum on benefits regardless of the Supreme Court action.

My first thought on these announcements was that there might be a little altruism here. Some insurers have saved a lot of money by retroactively canceling coverage when a serious illness was found for which the insurer could find some possible pre-existing condition. Having a lifetime maximum on benefits also held costs down for expensive illnesses such as cancer. Voluntarily keeping the ObamaCare provisions related to these items could hurt the insurers financially.

That was my first thought. If you dig a little, though, you will find that the insurers have raised premiums around 3% on average as a result of ObamaCare. They have already covered the costs of these provisions. It makes good business sense to keep the provisions, get positive publicity from doing so – and keep the extra premium.

What insurers have not committed to keeping

The biggie that insurers have not committed to keeping if ObamaCare is struck down is automatic coverage for children up to age 19 with pre-existing conditions. The problem for any company in unilaterally retaining this provision is that if others do not, all of the sickest individuals will flock to the one company that covers pre-existing conditions. Such a move could potentially put an insurer out of business. I don’t think anyone can blame the insurers from not jumping aboard on this one.

What will more likely happen on this front in the event that the Supreme Court overturns ObamaCare is that Congress will act to keep this provision. There appears to be support on both sides of the aisle for some type of extension.

Wait and see

Not all of the large insurance companies are stepping up preemptively. WellPoint (NYSE: WLP) and Cigna (NYSE: CI) are taking a wait-and-see stance. These two companies will announce their decisions after the Supreme Court rules. Many Americans are also covered through employer self-funded plans, where the employer is technically the insurer. These large employers seem to be waiting on the sidelines to see what the Supreme Court does.

Investors should probably also take a wait-and-see attitude. The conventional wisdom is that insurance stocks could take a hit if the Supreme Court strikes down all or part of ObamaCare. On the other hand, shares could surge if the act is upheld.

Of the three insurers pre-announcing their decisions, the one I would look most closely at after the dust settles is Aetna. While earnings have not been as strong as those of some peers, the stock is valued attractively. Aetna has a forward P/E of 7.59, on the low end of its historical range. The expected 5-year PEG is 0.81. If insurance stocks get hammered with an overturn of ObamaCare, Aetna could be even more of a bargain.

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