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ANALYSIS - U.S. Senate deal would knock health insurer profits

WASHINGTON/NEW YORK (Reuters) - A potential Senate health reform deal to force private health insurance companies to spend at least 90 cents of every dollar on medical costs would squeeze the industry’s profits and shake up the way they do business.

Such a requirement may be a longshot to be enacted in Congress’ final health reform legislation, but analysts say it would send shockwaves through the stocks if it became law.

The proposal, announced this week as part of a compromise between liberal and moderate Senate Democrats, would tighten rules on how insurers spend customers’ premiums on doctor visits and hospital bills versus advertising, profits and salaries.

While few details emerged, the change to so-called medical loss ratio (MLR) stands to force insurers to make significant cuts to their operations.

“The bigger concern is whether private companies can even meet an 90 percent MLR and still function,” said John Shepard, a senior healthcare analyst at Washington Research Group. Money not spent on care is critical not just for profits but also overhead and advertising against competitors, among other business costs.

President Barack Obama has made passing legislation to overhaul the nation’s healthcare system a top priority, and Democrats have made the health insurance sector at top target for reforms.

Health insurers already would face a number of new constraints in the overall health bill, including an end to denying customers over pre-existing conditions as well as a ban on how much care patients can have covered in a lifetimes.

But the latest deal would cause a major shift. While most insurers see the bulk of their revenues from customer premiums, a few such as UnitedHealth Group Inc have other service businesses. Other health insurance companies include Aetna Inc, Cigna Corp, Humana Inc and Wellpoint Inc

“It would require a significant restructuring of how the current health industry does business,” said Jason Gurda, a healthcare equities analyst at Leerink Swann.

Medical loss ratios are closely watched barometers on Wall Street. Fluctuations in the ratios may signal significant changes in profitability for a company.

When companies report quarterly results, it is not uncommon for a stock to sink if an insurer’s medical loss ratio is higher than expected, meaning that medical costs ate into premiums more than projected.

A 90 percent MLR would significantly threaten profitability and curtail the insurers’ ability to invest in areas such as technology to coordinate better medical care, Edward Jones analyst Steve Shubitz said.

“It’s another way of basically saying there’s a cap on your profitability, and no industry wants to operate under those conditions,” he said.

The industry maintains that health insurers profits are far less than those seen in other healthcare sectors such as pharmaceuticals and cites disease management and other programs aimed at improving patient health as significant costs.

“While the expenses associated with these strategies are technically accounted for in administrative costs, they directly improve patient health outcomes and, ultimately, help reduce overall costs,” America’s Health Insurance Plans spokesman Robert Zirkelbach said earlier this week.

Analysts say private insurers currently spend roughly 80 to 85 cents on the dollar on patient care but that has fluctuated over the years.

The government-run Medicare and Medicaid insurance plans for the elderly, disabled and poor have spent about 90 cents and 87 cents on the dollar respectively, said Shepard, but “they don’t have to advertise.”

The U.S. House of Representatives health bill passed last month calls for an MLR ratio of 85 cents. That legislation must still be merged with whatever the Senate passes before the provision would become law.

It’s not clear whether the proposal will survive as the Senate Democrats work to finish up their bill by as early as next week or, if it does, whether certain qualifications are made to limit it to certain kinds of health insurance policies.

“I think it’s absolutely not baked in at this point” to insurers’ stocks, Shubitz said. “That would be a very severe limitation to their profitability going forward. If that were to happen, I think the stocks would react quite negatively.”

Reporting by Susan Heavey and Lewis Krauskopf; editing by Carol Bishopric