By Emily Berry
American Medical News
April 5, 2010
Boosting earnings per share keeps Wall Street (and shareholders) happy. And in for-profit health insurance, shareholders come first.
When companies have extra cash, they think of the best way to benefit shareholders. “It is a fairly straightforward decision: they have dollars. They could potentially use those to buy new computers, hire new staff, open new markets, increase reimbursement or deliver more services, but in the for-profit world, their first obligation is returns to their owners,” said Joe Paduda, principal for the consulting firm Health Strategy Associates in Madison, Conn.
So how are they making money?
Administrative cost controls play some part. But there are other factors: First, insurers also make money from investing premium dollars, and the returns they make on those investments have stabilized since the market crash of 2008.
The other factor is plans’ billions of dollars worth of share buybacks, which affect the figure Wall Street watches most — earnings per share. Even if cash profits don’t change, per-share earnings will go up, because a company has fewer shares in the market.
Insurers’ investments and share buybacks matter, because they can indirectly affect doctors’ pay. If the market isn’t doing well and investment income drops, insurers feel even more shareholder pressure to raise premiums or cut costs, rather than risk an operating loss. That means less flexibility for doctors in negotiating reimbursements.
“They have less margin for error, because investment returns are so low,” Paduda said. If health plans see higher-than-expected spending, “or they sell a policy to folks who, God forbid, actually get sick, then they’ve got a problem.”
(Dave Shove, a New York-based senior research analyst specializing in managed care for BMO Capital Markets Equity Research Group) said share repurchases are simply a way to reward shareholders. Other options are paying dividends or buying other firms.
But health insurers historically have made very few dividend payments, he said, and “the health insurance business is pretty consolidated now. That just leaves one thing to do, and that is buy back stock, so they’re doing it.”
(Scott Harrington, PhD, professor of health care management at the Wharton School of the University of Pennsylvania) said health insurers, like other companies, have favored share repurchases over paying bigger dividends, in part because the tax code favors repurchases, but also because if shareholder dividends are increased one year then cut the next, the market interprets that as very bad news.
WellPoint Chief Financial Officer Wayne DeVeydt told investors at a March conference that the company plans to spend nearly $4 billion on share repurchases in 2010, following $2.6 billion in 2009.
Not everyone likes the way investments and stock prices drive the U.S. health care system. But short of a single-payer, government-controlled system, health system reform proposals are not aimed at changing this part of the way health insurance companies work.
“This is the world we live in,” Shove said. “These guys are for-profit, and as long as we have insurance companies, we have to live with the consequences of that.”
http://www.ama-assn.org/amednews/2010/04/05/bisa0405.htm
Comment:
By Don McCanne, MD
When some of the non-profit Blues insurers converted to for-profit status, the primary reason given for that conversion was to open access to capital markets. What does that mean?
When a shareholder-owned corporation issues new stock, it is allegedly for the purpose of raising capital to expand operations, growing the industry and increasing profits. That is what capitalism is all about.
But when a corporation buys back stock, it is not for the purpose of contracting operations, but rather it is to pump up the per share value. It is not merely a coincidence that this increases the value of the large blocks of shares held by top management and the board of directors, by increasing the percentage of ownership in the company. New stock issues dilute ownership, whereas stock repurchases concentrate ownership.
The funds used to buy back the shares could have been used instead to slow the growth in premiums or to reduce the excessive cost sharing burden created by the shift towards underinsurance products, benefiting their customers – the patients. But no. As this article states, “shareholders come first.”
As Dave Shove states, “”This is the world we live in. These guys are for-profit, and as long as we have insurance companies, we have to live with the consequences of that.”
Perhaps the most important statement in this article: “… short of a single-payer, government-controlled system, health system reform proposals are not aimed at changing this part of the way health insurance companies work.”
The obvious conclusion is that reform should not stop short of a single payer system. We have more work to do.