US health insurers to make additional $200bn

http://www.ft.com/intl/cms/s/0/315a6e6c-abd9-11e0-945a-00144feabdc0.html#axzz1ZBWIiTvk
(Taken from Financial Times)

US health insurers stand to make $200bn in additional revenues by the end of the decade from the state insurance exchanges created by the Obama health reforms, according to a study by PwC.

Insurers have been sceptical of the exchanges, which are due to be established in 2014, arguing that they will create additional costs and complexity for customers.

However, PwC said the insurers had warmed to the idea on the expectation of millions of new consumers and swelling premiums.

Fifty-two per cent of US insurance executives said they would participate in the exchanges and a third said they were considering it but were still undecided, PwC said. The remaining 17 per cent said they would opt out.

The state exchanges were created as part of last year’s legislation to help small businesses and individuals pool together to cut administrative costs and purchase quality and affordable coverage.

The details of the exchanges have remained hazy and states will have the option of creating their own or having them managed by the federal government.

On Monday, Kathleen Sebelius, secretary of the US Department of Health and Human Services, released guidelines setting minimum coverage standards for the exchanges.

“Insurance companies will compete for business on a transparent, level playing field, driving down costs,” Ms Sebelius said. “And exchanges will give individuals and small businesses the same purchasing power as big businesses and a choice of plans to fit their needs.”

According the PwC report, to be released on Tuesday, 12m consumers will buy insurance through the exchanges in 2014, creating about $60bn in revenue premiums for insurers. By 2019, this will swell to $200bn, when 28m consumers have purchased insurance.

“Despite concerns and unresolved legal and design questions, many insurers feel they cannot afford to opt out of health insurance exchanges,” said Jeff Gitlin, principal at PwC Health Industries. “The size of the market is difficult to ignore.”

The exchanges are at the centre of the controversial healthcare law, which continues to be embroiled in uncertainty amid legal challenges.

In May, the US House of Representatives voted to block funding for the exchanges as part of its effort to dismantle the law. The US Senate is unlikely to move the bill forward and the White House promised to veto it if necessary.

One side-effect that Michael McCallister, chief executive of Humana, is fearful about is that small and medium-sized companies will cease to offer coverage and shift workers in to exchanges.

Mr McCallister told the Financial Times last month the exchanges were a “jump ball” at this point but that if they lower distribution costs they could be a good thing.

Ana Gupte, healthcare analyst at Sanford Bernstein, said insurers were fearful of risks associated with the exchanges because they have to charge the same premiums to healthy and sick people and that young people might opt out from coverage because the penalties for doing so are relatively low.

However, most insurers still have strong incentives to participate in the programmes even if they do not like them.

“Anyone who wants to be a significant player in the insurance landscape has to participate,” Ms Gupte said. “Otherwise you would lose your current share.”