Why the Market Assumes too Much Margin Pressure on Insurers, too Little on Innovators


Narrow (below corporate level) application of MLR limits, and/or limiting premium growth to less than the rate of medical cost growth, work against regulators’ and the public’s interests. Thus neither practice is likely to be common; and insurers’ share-price reaction to these concerns appears over-done

If MLR limits are too narrowly applied, winning contracts cannot offset losing contracts, and insurers must price all contracts so that none lose. Gross premiums rise, reducing insurance uptake rates; and, beneficiaries’ excess paid-in capital is held prisoner for at least the duration of the contract period.

Incurring these two costs produces no gains – after rebates, MLRs under narrow limits net to the same figure as would have been achieved under broad application (corporate level) of MLR limits

If MLR limits are narrowly applied AND premiums cannot be raised in response, private capital exits geographies with such restrictions, reducing both competition and consumer choice. Private insurers’ ROIC’s already are below SP500 averages

State regulators are unlikely to carry through on isolated threats to hold premium growth below rates of underlying cost growth. Obvious effects include simultaneously reducing reserves and raising underwriters’ risk; less obvious, states that rely heavily on non-profits (e.g. Massachusetts) face the likely outcome of their non-profits having to seek capital – which almost surely means converting to for-profit

We provide further explanation and analysis of the pricing effects of the Independent Medicare Advisory Board (IMAB), showing that all of the IMAB’s 2015 – 2019 cost savings must come from roughly one-quarter of the Medicare cost base, and that innovators (brand pharma, biotech, devices, +/- capital equipment) are the most likely targets

We project that IMAB policies will reduce the Medicare sales of innovators by 11 to 19 percent between 2015 and 2019, and show why we believe this estimate is conservative

To view this entire report and to see other available research see “Prior Research”

Member: FINRA / SIPC 

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