Efficient Markets and the Health Care Bill

The Senate health care bill directs about $400 billion in new money to Medicaid. It also spends hundreds of billions of dollars on subsidies for people to buy private health insurance. How much of that money will result in extra health care for people and how much in extra profits for insurers? If you believe in the efficiency of the stock market, then looking at the price of insurance company stocks can help you figure this out. Nate Silver ran the numbers yesterday and here’s how it looked as of about 24 hours ago:


The 3.40 percent net gain translates into about $3.34 billion in market capitalization added. However, these six stocks do not represent the entirety of the private health insurance market. Collectively, they insure about 106 million people (WellPoint 35 million; United Health 26 million; Aetna 18 million; Humana 12 million; CIGNA 10 million; Coventry 5 million) as compared to a baseline of about 203 million private insurance policies nationwide, or about 52 percent of the total. Accounting for the gain in market value realized by the unaccounted-for private insurance companies would bring the total value added to $6.41 billion.

Additionally, the Senate’s health care bill did not go from a 0 to 100 percent chance of passing overnight. Rather, with the news over the weekend that Ben Nelson would support the package, a more reasonable estimation is that it went from having roughly a 50 percent chance of passing to about a 90 percent chance — an improvement of 40 percent. Thus, the run-up in stock prices today reflects about 40 percent of the overall gain in value to the private insurance companies from the Senate’s bill passing. This would mean that the total value added from passage of the bill is $16.04 billion.

Silver notes that this amounts to about 3.6 percent of the roughly $447 billion in new subsidies for the purchase of private insurance. Fortunately, if you’re not sure about the merits of that calculation this is roughly equal to the 3.3 percent profit margin currently enjoyed by the insurance industry.

I think that underscores the commonsense liberal view of this bill. It’s not primarily a giveaway to insurance companies, it’s primarily a vast expansion of access to health care. But it does include a substantial chunk of change for insurers. Which would be fine by me if health insurance industry profits created incentives for investment in some kind of useful infrastructure or R&D. But as best I can tell, it doesn’t. A lightly-regulated insurance industry adds value by screening high-risk individuals out of the risk-mitigation pool. Once you regulate the insurance industry to ensure that sick people can get care, insurance companies aren’t providing anything, they’re just siphoning 3-4 percent off the top.

If something like this bill is implemented, I expect future iterations of reform will focus on getting some of this money back. The CBO made it essentially impossible to raise the medical loss ratio even higher, by threatening to score that as full nationalization of the insurance industry. In a future context, however, such a score won’t be nearly as politically damaging. Then I think we can transform the Exchanges into something more like the Swiss system where the basic mandatory plans are offered on a non-profit basis by companies that then also offer more delux products on a for-profit basis.