Insight, analysis & opinion from Joe Paduda

Jan
8

P&C reserves and asbestos

ACE Insurance’s recent announcement that it is increasing asbestos reserves by almost $300 million may be a case of too little, but perhaps not too late.
Rating agencies have been closely monitoring reserving practices, paying particular attention to the actual amounts set aside as compared to actuarial estimates of future liability. For the layman, this means the companies that determine the financial viability of insurers want to make sure they have set aside enough money to pay for future claims.
This is important stuff – insurance is predicated on the policyholder’s confidence in the insurer’s ability to pay claims. Any concern on the part of present or potential policyholders about this ability is going to hurt the insurance company’s ability to attract new customers.
While one would think the close monitoring of insurance company financials will provide ample warning of impending problems, history shows that when troubles hit insurers, they can collapse seemingly overnight.
In this case, AM Best, one of the leading rating agencies, believes ACE has not set aside enough cash to pay for future asbestos liabilities. Best goes on to say:
“A.M. Best expects that additional charges will need to be taken in the next several years. However, given ACE’s current capital levels and its substantial earnings projections, potential charges taken in subsequent years should be readily absorbed.”
Best did not reduce ACE’s rating. Fitch Ratings (my personal favorite) did cut its rating of an ACE’s subsidiary’s ratings from a B+ to a B- on concerns over future claims and the impact of the charge on overall financials.
Fitch has been very cognizant of the asbestos reserving issue, noting in their latest review of the industry a potential shortfall of $43-$60 billion in reserves for asbestos-related claims at the end of 2003.
While this may seem arcane, esoteric, and generally pretty uninteresting, asbestos reserving practices and results thereof are a key to the viability of many an insurer.
Those who buy insurance should take notice.


Jan
6

Employers’ view of health care costs

The Society for Human Resource Management released a report on the top trends that will affect US businesses in 2005. It comes as no surprise that health care costs led the way, with 57% of respondents naming this issue as the top management concern.
Compare this with a survey conducted last year on opinions of P&C insurance execs, who did not include health care costs in their top eight issues of the year.
Why? Is P&C insurance not affected by health care? No, actually one of the largest cost drivers of medmal, liability, workers comp, private and fleet auto, etc (P&C insurance lines) is health care.
Do P&C carriers have health care costs under control? No, a recent survey indicates medical inflation in one key P&C line is 12% annually, a rate that is significantly higher than overall medical trend.
So why the disconnect?
My guess, and it is only a guess, is a cultural inability to grasp the importance of medical trend. Most P&C insurance execs grew up in the business, viewing claims and the health care part of claims as financial numbers, and thus do not understand health care beyond its’ financial implications. It is viewed as a constant, a black hole, a great unknowable. I’ve heard one exec state “claims are claims, trend is trend”.
With this attitude, no wonder the trend rate is 12%.


Jan
4

Governors fight Medicaid cuts

The National Governors’ Assn is mounting a surprisingly united front in the battle with the federal government over Medicaid funding . Governors are complaining that the sum of currently proposed and possible federal changes to Medicaid may leave states unable to make up any funding deficit.
Medicaid accounts for 22% of the average state budget, pays for 50% of all long term care and 70% of nursing home costs. Total expenditures for 2004 are estimated at $360 billion, split equally between states and the federal givernment.
Some of the proposed changes look remarkably like the ones implemented in Utah under then-Gov. Mike Leavitt, recently nominated to head HHS. These include (thanks to California HealthLine):
–Allow states to make changes to Medicaid and SCHIP (child health), such as increasing copayments and limiting eligibility, without first obtaining federal waivers;
–Allow local officials to provide different benefits in different parts of a state; and
–Allow states to charge higher fees to higher-income recipients.
Why should the average insurance exec care? Well, this “stuff” usually flows downhill, which likely means cuts in Medicaid reimbursement to providers. Providers will seek to recoup this lost revenue from other sources, particularly those that are soft targets.
Smaller health plans, TPAs, and P&C carriers, take note.


Jan
3

Uninsurance

Peter Rousmaniere is both a good friend and a very astute observer of things health care, insurance, political, and just plain interesting in nature. He publishes a daily missive entitled “Three Witnesses”; below is an extract from his 12/30/2004 edition.
I am encouraging Peter to enter the world of the blog – if you agree, please email him at pfr@rousmaniere.com.
the passage begins – Washington Post economic strains on American workers worsening
Highly edited down – PFR
“Over the past two decades, companies have moved en masse away from traditional pensions in which employers pay the cost and employees get a set amount after retiring. Employer-based health care coverage has fallen as well, not just for workers in low-wage jobs, but increasingly for those in middle-class jobs. One analysis estimates that there were 5 million fewer jobs providing health insurance in 2004 than there were just three years earlier. Overall, nearly 1 in 5 full-time workers today goes without health insurance; among part-time workers, it’s 1 in 4.
Those who manage to keep their benefits often must pick up their share of the higher cost. Employee contributions for family coverage were 49 percent higher in 2004 than they were in 2001, and contributions for individual coverage were 57 percent higher, according to the Kaiser Family Foundation. ”


Jan
2

A response to a physician’s rant about health care costs…

I was reading a blog from a practicing generalist, who was making the point that health care costs are increasing due to technology, and that this was benefiting patients. There were no statistics to confirm this (longer life expectancies, better survival rates, improved functionality), but I take his point. There is no question technology is improving many people’s lives.
However, technolgy can be a two-edged sword, especialy for those who get a false negative or positive on a prostate cancer screen, and take/don’t take action based on what is acknowledged to be a very poor test.
As one from the “payer” side, I’d recommend we take the argument on health care costs a step further. Like it or not, employers pay a significant portion of health care costs, both directly (premiums) and indirectly (cost-shifting for uninsured, FICA taxes, income taxes, etc.)
The real issue employers have with health care costs is they have NO sense for their return on the investment. And that is the fault of the medical and managed care communities. Employers carefully assess each investment into plant and equipment, personnel and training, investment options and new products. They calculate RoIs carefully, assess performance constantly, and get as comfortable as possible with an expenditure BEFORE they make the investment.
Think about health care – what do employers get? Happy employees? Rarely – health insurance is a terrible “good” – people only use it when they are ill or injured, it is convoluted and difficult to understand, and they have to pay for part of it too!
Actually, what employers SHOULD be thinking about is the demonstrated ability of a health care provider to “deliver” healthy, fully functional employees and families, thereby enhancing productivity and, therefore RoI. Health insurance is an investment in productivity.
If we can evolve to this way of thinking, much of the present bickering about health care costs will end. Sure, there will be arguments about impact rates, who delivers what benefit, and what evaluation methodology makes the most sense, but that will signal we are talking about the right things.
So, the next time someone complains about charges, costs, or premiums, ask them how that “good” will help them function. They won’t know the answer, but perhaps they’ll start thinking about it.


Jan
2

Top Trends in the health insurance markets

Here are the top trends in health care as I see them, using the actuarial method of looking back over my shoulder to see what happened, and thereby predicting the future with confidence.
1. More consolidation amongst health insurers.
Many years ago (say, 8 or so) industry pundits were predicting that the health insurance industry would consolidate to a handful of large players, an oligopoly if you will. 2004 has added a lot of credibility to that argument, with Anthem-Wellpoint, Coventry-First Health, and United Healthcare-Oxford three of the more significant. The rationale behind these mergers is classic business school stuff – it is a mature industry, with limited growth opportunities, thereby favoring those companies with market power, economies of scale, and lots of capital/ready access to capital to grow by acquisition.
Expect more of the same in 2005.
2. The return of the hospital
Hospital expenses are the single most powerful driver of overall health care inflation, and they are showing renewed power. Weak hospitals, marginal managers, and bad business concepts have been driven out by the brutal forces of competition and reimbursement, leaving leaner, smarter, more aggressive institutions hardened by years of bargaining with managed care companies.
For now, hospitals hold the upper hand, and managed care firms are having a much tougher time at the negotiating table.
Expect this to remain the case throughout 2005.
3. Cuts in Medicaid and Medicare
Mr. Bush’s desire to reduce federal expenditures over the long term will result in significant changes in these behemoth programs. Health care costs are a huge portion of the federal budget, and present an attractive target to those focused on cutting deficits. Some of this is already apparent in the (latest) strident campaign to cut out “waste and abuse”.
There will very likely be tough cuts in hospital and physician reimbursement over the next two years, and perhaps a drastic overhaul of Medicaid in the form of block grants to states rather than the present “defined benefits” program model. When CMS shudders, the rest of the health care community quakes. These providers will look to recoup their lost revenue from somewhere…
Expect a very heated battle, with Bush et al eventually pushing through a drastic overhaul of these two “Great Society” programs.


Jan
1

Coventry – FH deal nearing completion

The pending acquisition of First Health by Coventry is due to close within the month. First Health’s shareholders are scheduled to vote on the deal Jan 28th (evidently there is no need for a Coventry shareholder vote).
The announcement signals that all regulatory approvals have been obtained.
The deal had received a response from the analysts and financial markets that can only be described as lukewarm to downright cold, as Coventry’s stock value plummeted after the announcement on October 14. However, the price has recently recovered, and is now essentially unchanged from the pre-announcement level.
While it is impossible to precisely identify the reason for the increase, one can only assume it is due to confidence in Coventry’s management and their ability to turn around an under-performing asset. To quote S&P;
“Standard & Poor’s believes Coventry maintains a good financial and market profile, partly because of its sustained pricing discipline and strong focus on the fundamentals of its business. Standard & Poor’s also believes Coventry is capable of integrating First Health in a methodical way that limits operational disruption to the consolidated enterprise. ”


Dec
31

The future of Medicaid

With the nomination of of Mike Leavitt to the post of Secretary of Health and Human Services, President Bush has sent a clear signal of his intentions to drastically reform the Medicaid system. Leavitt, a former governor of Utah, was instrumental in helping Utah secure a waiver from HHS that enabled the state to make significant changes in its Medicaid program.
These changes represented significant trade-offs, namely funding expanded coverage (adding populations not previously covered by Medicaid) by implementing cost sharing for beneficiaries and cutting some benefits.
Mr. Bush has made it quite clear that he intends to move the nation towards the “ownership society”. In the case of Medicaid, the implication is the states will receive block grants of funds from the federal government, funds that they will have significant discretion in regards to how they spend them. According to the LA Times, “In the past, the administration has proposed capping the federal share of Medicaid, currently about $180 billion a year…Medicare faces pressure to cut payments to hospitals and other providers.”
The net result – states will “own” Medicaid, be free to develop and implement their own programs, and do so with minimal interference from the feds.
While this sounds great at first blush, even Republican governors have serious concerns. In essence, their concern is that the President is making Medicaid a “defined contribution” program, thereby limiting the federal government’s future expenditures. This is a marked change from the present “defined benefit” form of Medicaid, where the governments (state and federal) are allocate enough funds to cover the benefits provided to qualified individuals’ costs. Remember, the feds took over the provision of health care to the poor in large part because some states were not doing what federal legislators deemed an adequate job.
In addition to his experience as Utah governor, Mr. Leavitt was head of the EPA and got his start as an insurance broker in Utah. Leavitt is known for his political prowess and willingness to stick to the task. While he will be tasked with Medicare reform and other issues, Leavitt will likely start with Medicaid.
This nomination is the clearest possible signal that Medicaid is in for the biggest change in its forty-some years of existence.


Dec
31

Health care blog worth watching

The Piper Report is a health-care oriented blog focused on Medicare, Medicaid, and some employer-based health programs. The author is well-read and well-informed about governmental programs, and seems to be on top of the latest research, with a heavy emphasis on governmental programs pertaining to drug coverage.
For example, Piper’s latest contribution summarizes some of the latest thinking regarding Medicare prescription drug programs.
Other links on Piper’s blog include the National Pharmaceutical Council’s health care cost:quality equation and a prognostication about possible Congressional action on Medicare.
As you travel through the blogosphere, you’ll encounter sites such as Mr. Piper’s that provide a depth of insight into a specific topic unobtainable anywhere else. Kudos to Mr. Piper et al for their willingness to share their perspectives.


Dec
30

Property and Casualty Results

Fitch Ratings has released its’ “final” analysis of the P&C industry’s results for 2003. The report focuses on reserve deficiencies, and while the results look better than those from a year ago, the overall message is troubling.
Here are the highlights and my comments in italics…
–total reserve deficiency at the end of 2003 was between $43 and $61 billion…the industry continues to be unable to predict future costs with any accuracy; this will give investors pause as they consider whether to provide funds to the P&C industry, leading (over the longer term) to capital constraints and therefore a tighter market
–most of this is due to under-reserving in the accident years 1994-2003, with the bulk between 1997 and 2002. historically poor reserving in this period has been due to a failure to predict the rise in health care costs. Many reserves for claims occuring in the late nineties assumed a health care inflation rate of 7-8%, an assumption that continues to drag down financial results, and has even contributed to the demise of several P&C carriers, including Atlantic Mutual.
–asbestos is responsible for between $15 and $25 billion of the total, reflecting the industry’s continued head-in-the-sand approach.
How do we put this in context?
1. The P&C market appears to be softening, with rates for short-tail lines (those where claims are usually reported within a few months of the end of the policy term) falling while longer term lines (liability, Workers’ Comp) leveling off or declining somewhat. This softening cannot continue if carriers are going to add to reserves – without higher premiums to make up the deficit, the reserve deficiency will continue to hang over the market.
2. Health care costs receive barely a mention in the Fitch report. Health care costs are the primary driver of most claims, and this lack of attention on the part of a premier rating agency and industry expert does not bode well for the industry as a whole – if they do not know what is causing the problem, they will not be able to address it. And the industry has not demonstrated ANY awareness of or commitment to addressing rising medical costs, even as trend rates in P&C exceed 12%.
3. Asbestos, asbestos, asbestos – the word that brings chills to the executive suite at many an insurer. Some carriers have “bitten the bullet”, while others seem to be adopting a “hope and pray” approach to dealing with their reserving problem. That approach, especially when viewed in the context of the softening market, will likely mean additional financial struggles for some P&C carriers and reinsurers.


Joe Paduda is the principal of Health Strategy Associates

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