US healthcare industry: crisis will expose flaws

With coronavirus tightening its grip, the past few years look like a lost golden age for US healthcare companies. The introduction of the Affordable Care Act in 2010 brought an influx of new business. Consolidation allowed companies to wring out costs and charge higher prices. The Big Five insurers — UnitedHealth, Anthem, Cigna, Humana and CVS Health — collectively raked in a record $33.1bn in profits on $820bn of revenues last year. 

The pandemic will impose huge strains on a healthcare system where efficiency is low and rent-seeking is high. States have closed schools, bars and restaurants. Much of the country’s labour force has retreated into self-enforced isolation in a last-ditch attempt to slow the pandemic.

It is tough to calculate the financial impact on such an opaque, multi-layered labyrinth as the American healthcare system. Take testing. The government has ordered insurers to cover the cost of coronavirus tests. That varies according to manufacturer and lab, but assume a range of $500 to $1,500. If just 5 per cent of the US population, or 16.5m people, get tested, that implies a financial hit of between $8.3bn and $24.8bn. 

A bigger unknown is the severity and resultant hospitalisation costs. A severe outbreak hospitalising 4m people would cost insurers $80bn, according to S&P Global. A moderate outbreak, comparable with a severe flu season, drops the bill to about $17.6bn.

Still, insurers have some leeway on the financial side. Some costs will be offset by the postponement of elective surgery as people stay indoors. The country’s top five insurers, which spent $18bn on share repurchases and dividend payments last year, can also suspend stock buybacks to preserve capital. And even if coronavirus threatens this year’s profits, insurers can push up premiums next year.

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Instead, the biggest threat to insurers’ profits is political. Across the US, the coronavirus is shedding still more light on the healthcare system’s failings. Millions remain uninsured. For those that have cover, costs are rising. High deductibles and co-pays, a complicated system of in-network and out of network providers, and a proliferation of middlemen, all serve to snag the system. The epidemic will show how poorly Americans are served by their markets-based healthcare system. Reform may follow.

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