Obamacare Is Changing Health Insurance Forever

Is health insurance really insurance -- and does it matter?

True insurance protects against catastrophic losses. Think of flood insurance covering the damage as the couch floats by the window, or a life insurance policy paying out after a loved one's death. Health insurance slants more toward maintenance care, such as annual checkups, that the other insurances tend to avoid. Good luck getting your car insurance to pick up your 60,000-mile tuneup.

The different types of insurance have had similar means of funding. Customers pay a fee set according to risk level. Screening guidelines kept out the riskiest individuals and mitigated the overall level of risk the company would assume. The excluded might have included homes in hurricane-prone areas or individuals with a history of serious health problems.

But the Affordable Care Act, or ACA, is changing how private health insurers can screen patients and the premiums they can charge. That change is causing a new health industry shift that could redefine its future.

Redefining health insurance
Health insurance in the United States dates back to the Civil War era, when accident coverage proved popular enough to encourage more comprehensive private plans. But insurance as we know it started much later, following some innovations in the medical community. A look at that start helps explain the current path.

In 1929, a doctor at Baylor University Hospital in Texas noticed that teachers weren't settling medical bills. So he started a system where the teachers could pay in a small amount, or a premium, and receive up to 21 days of health coverage  The Baylor Plan began to spread as the Great Depression took off.

Cut to three decades later and a group of hospitals decided to merge their plans into one nonprofit called Blue Cross. The company faced increasing competition from private plans -- which charged premiums based on level of risk -- and soon adopted a similar business model. The methods of the private plans became the norm.

Insurers thrived in the new market and have continued to evolve over the years. Five companies have fought to the top of the heap as business boomed. Take a look at how those company's performed versus the S&P 500 over the past 10 years.

HUM Total Return Price Chart

HUM Total Return Price data by YCharts.

Most of the companies have grown significantly over the past years thanks to acquisitions.  Here's how they stacked up in market position at the end of fiscal 2012.

Company

Market Cap

P/E Ratio

Covered lives*, in millions

UnitedHealth (NYSE: UNH  )

56.1 billion

10.37

40.925

WellPoint (NYSE: WLP  )

19.8 billion

7.97

36.130

Aetna (NYSE: AET  )

16.9 billion

10.70

18.242

Cigna (NYSE: CI  )

17.7 billion

11.06

14.045

Humana (NYSE: HUM  )

10.9 billion

9.22

9.103

Sources: Company 10-K reports, Yahoo! Finance. *Medical coverage only; excludes dental, Medicare Part D, etc.

But change is in the wind, thanks to the ACA, and insurers won't have the same risk mitigation options. Under the new health insurance exchanges, insurers can't deny coverage based on pre-existing conditions and have limits to how much they can increase premium charges due to a patient's history.

The insurers' long history of adaptation has come in handy.  

New focus
Medicare and Medicaid coverage have become increasingly popular due to the growths in the aging population and potential ACA-related Medicaid expansions.  Yes, those patient groups also carry a deal of risk -- but it's government-sponsored risk that also helps with general diversification.

Last year's wave of acquisitions aimed to increase presence in these areas. UnitedHealth bought XLHealth, provider of Medicare Advantage plans and dual-eligible coverage. WellPoint bought Amerigroup for its strong Medicaid business. And the list goes on.

But the road forward for these programs is unproven, since the ACA remains a work in progress. And the companies differ in how exposed they've become to these specific risks. UnitedHealth's Community & State segment only accounted for about 15% of overall revenues in fiscal 2012. Over at Humana, retail Medicare Advantage customers accounted for more than 53% of overall revenues.

Foolish final thoughts
The ACA changes will push health insurance further away from true insurance products in how risk can balance out with denials or premium hikes. But the government isn't leaving companies high and dry, since the ACA also includes several provisions to help ease the incoming risk burden. Notably, the individual mandate and health insurance exchanges may drive more healthy individuals into policies if they don't want to pay the opt-out fees.

Companies still need to get smarter about how they manage risks within the new framework. Diversification and sheer size, like we see with UnitedHealth, has the best shot of staying on top. But Humana and other smaller, risk-laden companies might have troubled waters ahead.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 28, 2013, at 3:56 PM, airjackie wrote:

    All this fuss over Obamacare when the credit should go to the person who did it first and it's been successful for over 7 years. Every Mass. citizen is covered and the Health Insurance companies agreed because of the volume of customers that make great profits and affordable to those that pay. No over charging and all serviced even those with pre-conditions. Obama just copied Romneycare and of course smart health care companies are jumping on board for the millions of customers. Only the slow mined people don't get it. Mitt did say he would repeal Obamacare but for anyone who wanted coverage they should move to Mass.

  • Report this Comment On March 28, 2013, at 5:23 PM, Clownzilla wrote:

    @airjackie

    The problem is that the Massachusetts law was a state law. If the Mass. citizen wanted to leave the state they could. In a Federal law, that is not possible unless you want to forfeit your US citizenship. The other problem is the federal law lets a person buy insurance AFTER they get sick. The penalty for not buying insurance is so low that a person with common sense would be stupid to buy insurance and would benefit just paying the penalty until insurance was needed. How would an auto insurance company survive if people could buy insurance after a wreck? I can almost promise that with penalties this low there will be WAY more people not buy insurance than the Obamacare supporters accept.

  • Report this Comment On March 28, 2013, at 7:47 PM, indy06 wrote:

    You ever ask yourself why every other state didn't just clone this thing? The only reason it wasn't adopted in other states is that the ones would want it, would have been bankrupted by it. ie California, Illinois, ect. So those states went to their national leaders to get other people's money for it.

    "Obama just copied Romneycare" No, just ... no! Romneycare was 70 pages, Obamacare was 2700. A lot of the multitude of problems are in the other 2630 pages.

    The biggest issue I see every day is that Obamacare punishes any company with more than 50 employees. If the goal in an economy is jobs, punishing companies for growing isn't the smartest path.

  • Report this Comment On March 28, 2013, at 10:52 PM, michaelkj77 wrote:

    I could easily hire 10 more people, and probably 250 - 280 over the next 10 - 12 years depending on the economy. However I will never do so. I'd be foolish to do so. I'll keep my core employee number around 40 - 45 and bring on part-time contractors to do the rest. I don't like doing that. I'd rather hire full-timers and invest in their future, train them, groom them for a successful career so they help my business, but once I cross that 50 employee boundary, a whole new set of rules, fees, penalties and the like kick in, all because Mr. Obama wanted to take over the health care industry, grow government instead of the economy, and make people more dependent on democrats in power. That's your wonderful Mr. Obama. He cares nothing of the private sector except as a target for blame. Screw you, Mr. O. You've done nothing for the common man except to make more and more of them unemployable.

  • Report this Comment On May 21, 2013, at 12:52 PM, gbuddha2012 wrote:

    Cbo studies show Obamacare reduces nations healthcare costs over 1.5 trillion dollars over the next 20 yrs. Record profits across the board - and business can't pay ? In the end Obamacare makes small business more competitive since every person in the country is insured. 97% of all business has fewer than 50 employee's - and that's a fact.

  • Report this Comment On May 21, 2013, at 12:54 PM, gbuddha2012 wrote:

    and by way if anyone doesn't like the american social contract please move now...

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