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WASHINGTON - Within the debate over the law that overhauls the U.S. health care system, speculation swirls about a doomsday scenario for the health insurance industry.
As the Supreme Court pondered the legal merits of the Affordable Care Act last week, Justice Antonin Scalia mentioned the possibility of "bankrupting insurance companies and the whole system ... tumbling down."
Outside the court, Rep. Michele Bachmann of Minnesota whipped up a crowd of Tea Party protesters, predicting "chaos on an economic spectacle like we have never seen."
The doomsday theory plays out like this: The high court eliminates only the individual mandate within the health care law that requires all Americans to buy insurance or face a fine. Health insurance companies then would have to follow the rest of the law and cover millions more Americans with pre-existing conditions, among other cost burdens -- without the benefit of adding millions of healthy people that the individual mandate requires.
Those fearing such a scenario say it would cripple the health insurance industry. But few, if any, financial analysts or health economists share the same level of concern.
"It's not like an apocalyptic disaster," said Chuck Phelps, a retired professor of health economics at the University of Rochester. "The people harmed are not the insurance companies. The people harmed are relatively healthy people who want to buy individual policies. They won't be able to."
The health insurance industry has asked the Supreme Court to strike down certain patient protections if the justices take away the individual mandate. The industry made the request because the number of uninsured did not decline in states that have tried to increase coverage without mandates, according to the America's Health Insurance Plans, a trade group representing companies covering 200 million Americans.
Still, the industry never predicted bankruptcies if the high court strikes down the individual mandate and nothing else. That's because individual health care policies represent just 5 percent of the health insurance industry's business, and companies are only obliged to issue policies to those who pay premiums.
Health insurance companies, including Minnesota-based UnitedHealth Group, the nation's largest health insurer by sales, agreed to support health reform law with the understanding that they could tap a huge new market of "young invincibles" -- those who will cost much less to treat than they pay in premiums. In exchange, insurers agreed to cover people with preexisting medical conditions and to set premiums based on regional medical costs and not on individual health histories or age.
If health insurance companies lost that new market, they would face a "manageable" 10 percent drop in pretax income, not bankruptcy, said Ana Gupte, a health insurance specialist with Bernstein Research. Among the country's biggest health insurers, UnitedHealth Group is in the best position to absorb any Supreme Court decision on health care reform, Gupte said.
"Their exposure to the employer and individual insurance markets is less than a third of their business and getting smaller," she explained.
Roughly 30 percent of UnitedHealth's business is handling Medicare policies for the government, Gupte noted. Another 10 percent is in Medicaid, publicly paid health insurance for the poor. Managing plans for self-insured companies accounts for 10 percent. And UnitedHealth's expanding medical information technology wing, Optum, totals 20 percent.
"They are putting more capital into Optum," Gupte said. "That means they are pushing their independent, unregulated business."
UnitedHealth would face "challenges" without the individual mandate, explained Jason Gurda, an analyst with Leerink Swann, a health care-focused investment bank. But "more diversified providers are not as exposed."
UnitedHealth declined an interview request to discuss ways the company has protected itself by spreading risks. "UnitedHealth Group is focused on effectively implementing existing law," spokesman Matt Stearns said in a statement. "If the law is changed, we will make the appropriate adjustments at that time."
While UnitedHealth has diversified its business interests beyond other health insurance giants, such as Humana, WellPoint and Cigna, those companies are still not in danger of going under, no matter how the Supreme Court rules, analysts say.
Health insurance companies were making record profits before the health care law by denying coverage for pre-existing conditions, selectively choosing individuals to cover and by setting premiums based on personal health histories and ages, Phelps said. If the Supreme Court overturns the entire reform, he added, insurance companies remain in that highly profitable system.
Meanwhile, if only the individual mandate goes away, health care reform's goal of providing affordable medical treatment for many of America's 40 million uninsured citizens goes unresolved. Costs of their care continues to get passed on to those with insurance in the form of higher premiums, Phelps said.
"People who don't have insurance now" will be hurt the most, he said. "The insurance companies will be fine."
Jim Spencer • 202-408-2752