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The Stock Market Shows the True Winners of the Affordable Care Act

By on August 30, 2013 in Money

The Stock Market Shows the True Winners of the Affordable Care ActThere’s been a lot of talk around the Affordable Care Act and who is truly benefiting. The politicians in Washington have been saying that consumers will have better coverage at a lower cost for years as the controversial legislation rolled out.

Yet that hasn’t come to fruition yet. To start, it is exceedingly difficult to price a policy, apply for it, and get it paid for using the federal healthcare exchange website.

For those that have completed these steps they’ve been surprised by the higher costs of coverage. Higher costs were to be expected compared to some more basic health insurance policies because the new health insurance plans require insurers to cover ten essential health benefits such as emergency room visits and prescriptions.

At least as of right now it seems that consumers aren’t winning.

So if they aren’t winning, who is?

The Real Winners of the Affordable Care Act: The Health Insurance Companies

Health insurance companies are regulated so that they cannot gouge customers just to generate more profit. And despite high revenue numbers the profit margins in the health insurance industry are pretty low: United Health Group generated 4.99% profit on $110,618,000,000 in revenue during 2012.

That still comes out to a total profit of $5,526,000,000 – five and a half billion dollars – but the profit margins aren’t astronomical.

There are three ways for health insurers to make more money:

  • increase premium revenues through higher volume or higher premiums

  • decrease claims payouts

  • reduce selling, general, and administrative costs

The first two are regulated heavily by the government to prevent gouging. But if you increase the number of people you insure and accept premiums from them at the regulated rate, you are still making more money.

This is where the Affordable Care Act comes in.

Let’s say you’re the CEO of a health insurance company at $50 billion in revenues and 5% profit margin. That means your company earns $2,500,000,000 in profit in a year.

If you can increase volume by 20% and leave rates untouched you would grow from $50 billion to $60 billion in revenue. That extra $10 billion in revenue would mean an extra $500,000,000 in profit for the organization (and your bonus pool!).

In short, the health insurance companies are the big winners with the Affordable Care Act.

It is mandated law that individuals buy health insurance. Someone needs to insure them, why not us? And when we insure them we are guaranteed a profit thanks to government regulations. We can substitute higher premiums for higher volume of the same priced premiums. (And in reality the premiums for the new policies dictated by the Affordable Care Act are going to be higher due to covering more health risks.)

Who Does Wall Street Think Will Win?

Here are the stock gains of some major insurers over the last 12 months:

  • Cigna: 67%

  • WellPoint: 66%

  • Aetna: 60%

  • Humana: 59%

  • United Health Group: 37%

  • S&P 500 as a whole: 28%

And no worries, the financial analysts of Wall Street are expecting big gains in revenue for 2014, too.

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