HMOs may hike premiums, slash jobs under reform

NEW YORK (Reuters) - Health insurers may turn to steeper premium increases, job cuts and dealmaking to maintain profits in the wake of a landmark U.S. health overhaul that imposes new regulations and costs on the industry.

The U.S. House of Representatives approved the reform legislation late on Sunday, climaxing a year of uncertainty over the overhaul that cast a long shadow over the health insurance industry’s future.

The overhaul faces expected approval in the Senate later this week while a legal threat looms from at least 11 states.

Should the changes become law, they create myriad pressures -- some almost immediately -- on the industry’s ability to maintain its profitability.

While many of the provisions and fees based on market share do not kick in until 2014, some analysts expect insurers will act soon to shore up margins.

“All of this is going to cause the cost of healthcare insurance premiums to skyrocket massively,” Collins Stewart analyst Brian Wright said.

“These companies can’t run at a loss, so while you can eat some margin at the end of the day you have to massively raise prices. Massively,” Wright said. “California will be begging for only 39 percent rate increases.”

Democrats in recent weeks had seized on the insurers' rate hikes to generate momentum for health reform, including holding a Congressional hearing on WellPoint's WLP.N increases of as high as 39 percent.

The Morgan Stanley Healthcare Payor index .HMO of insurers rose 1.3 percent on Monday, although large insurers WellPoint and UnitedHealth Group UNH.N traded lower.


The legislation expands coverage to 32 million Americans, adding a wealth of new potential customers for the insurers.

But because health plans will no longer be able to exclude people from coverage because of pre-existing illnesses, analysts fear the insurers will be burdened by greater medical costs that hurt profits.

Other regulations include mandating how much premium revenue the plans can spend on medical costs -- another potential squeeze to their profit margins.

“Now they’re much more heavily regulated than they ever were before,” said Tim Nelson, a healthcare analyst with First American Funds.

The health insurers also face significant cuts to rates for Medicare Advantage plans for the elderly, a growth area for companies such as Humana HUM.N and UnitedHealth.

To adjust, analysts say health insurers will look hard at passing on costs through sharp premium rate increases, but that may hold political dangers.

Even though Democrats do not need to harp on premiums to pass the legislation any more, the political climate may stay hostile against hefty increases.

“If they do raise their premiums as a way to combat against this ... it might not be as viable as it has been in the past,” Edward Jones analyst Steve Shubitz said. “There’s going to be more scrutiny.”

With rate increases potentially more challenging to pull off, health insurers may try to slash administrative costs.

Health insurers across the board have already announced job cuts over the past two years to adjust for fewer members stemming from the weak economy.

But more job reductions could be on the way, said Sanford Bernstein analyst Ana Gupte. The insurers also may seek to renegotiate their contracts with brokers and take other actions to operate more efficiently, she said.

“I think they will make a much bigger push to reduce some of their administrative costs,” Gupte said.

Health insurers also may take a harder line in negotiating rates with hospitals, Gupte said.

The approval of reform also could clear the way for more mergers among health insurers, as they seek greater leverage in negotiating rates with providers.

With the legislation expanding the Medicaid program for the poor, companies that specialize in Medicaid plans such as Amerigroup AGP.N or Centene CNC.N could become desirable targets.

“I think there will be more consolidation in managed care, definitely,” said Maria Mendelsberg, a principal at Cambiar Investors. “You couldn’t have any deals happen until this got resolved.”

Reporting by Lewis Krauskopf, editing by Matthew Lewis