Insurance touches the lives of all U.S. citizens, yet is still a fairly mysterious financial instrument even for the most sophisticated business leaders. To better understand the behavior of this insurance one must blend a mix of economics and social science to arrive at common sense explanations for what is happening and why.
“There are very meaningful financial impacts felt by those who purchase health insurance, and those impacts are largely caused by politics,” says Sergio Bechara, president and CEO of Millennium Corporate Solutions.
As an insurance broker, Bechara is well-positioned to understand the plight of health insurance companies and employers alike.
Smart Business spoke with Bechara about the ramifications of President Obama’s health care plan on the health insurance industry and how it will affect employers.
Why are health insurance costs rising?
Ask yourself what you would do if you owned a health insurance company facing a legislative tsunami known as ‘Obamacare’ with two potential financial threats looming.
1) The government might compete against you. However, because the government, unlike your other competitors, can print money when it needs more, you might be competing against a better capitalized opponent.
2) You might be forced to take on risks you did not calculate for as a condition of doing business. This is a very big deal.
How can the addition of new risks pose a financial threat to insurance companies?
How many banks failed in the last four years? More than 350. By contrast, how many insurance companies have failed? Only one.
Insurance companies have a major investment in actuarial analytics to help determine their risk and, therefore, their future pricing. They measure a large assortment of data such as cost of care, likelihood of disease, probability of use resulting from accidents, etc. These companies have years and years of data to improve their accuracy of assumptions leading to their pricing. However, the wild card with zero data to analyze is the complete unpredictability that ‘Obamacare’ might have on their business.
It creates a potentially tremendous unknown that has to go into their tried-and-true formula. There are no data points telling them how to predict their future cost, because nobody really knows how much it is going to cost.
So are insurance companies adapting, and what is the impact to employers?
As a smart businessperson, what would you do? Lowering rates in an uncertain economy never happens. Essentially, you have two choices: Begin to build a ‘war chest’ to protect yourself against the future unknown or continue business as usual and simply meet tomorrow’s challenges when tomorrow comes. This was, of course, a rhetorical question, but one that has a serious ripple effect because every dollar that goes into a war chest is one dollar that goes out of circulation from our economy.
Now how many other industries, companies, sole proprietorships are reacting the same way with their capital for the similar core reason: an uncertain economy? When capital exits circulation, the economy slows.
There is no greater or lesser wealth or money on this planet today than there was in 2007. As a visual example, if one were to look at Earth from space, and take ‘before’ and ‘after’ photographs, it would look the same in 2007 as it does today. There were no aliens that came to Earth and left with the planet’s wealth in 2008.
The flow of capital is the life’s blood of any business and any economy.
When capital flows like a river, businesses thrive like reeds on the river banks, when capital flows like oozing lava businesses suffer from atrophy — it is that simple. All the dollars and financial resources that were on this planet in 2007 have not left the planet. They have just stopped flowing through our economic streams. This is either because of dams being built or streams being redirected to foreign countries or reservoirs.
How will employers be affected and how will they react?
They are going to have increased costs and increased overhead. Employers have three choices of how to handle the increases coming from the health insurance sector. They can pass them along to employees by asking them to participate more in their own health insurance through company plans, or the company can absorb the increase and try to pass it along to its customers. There is one other choice: avoid an increase in cost by decreasing benefits.
What is the outlook for the future, and how will our economic climate affect that outlook?
‘Jobs, jobs, jobs.’ This has been the battle cry from all corners of the nation and from all walks of life. However, for a job to exist or be created, an employer or a business of some kind must exist. That business will have shareholders and/or owners. That business must have a need followed by a willingness to hire. That having been said, let’s take a look at our climate:
1) Banks lending with considerable more restraint to not lending at all
2) Threat of higher taxes and of ‘unknown’ amounts
3) In California, new regulations giving employees more rights to unionize or threaten to increase the cost of doing business in an already suppressed economy leaving little room to pass along increases
4) Regulatory enforcement from various agencies, especially the Occupational Safety and Health Administration, becoming more present that ever. In fact, in our firm of insurance brokering and risk management, defending clients from O.S.H.A. has been the fastest growing part of our practice.
Sergio Bechara is president and CEO of Millennium Corporate Solutions. Reach him at (949) 679-7120 or [email protected].
