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Obamacare benefiting both hospitals and insurers—for now

October 20, 2014

Usually, when Americans spend more on health care, hospitals gain while insurers lose. When spending goes down, hospitals suffer while insurers pocket larger profits.

For the time being, however, it looks like Obamacare, combined with the lingering effects of the Great Recession, is giving a lift to both hospitals and insurers.

That’s why some analysts covering Indianapolis-based WellPoint Inc. expect to see the company’s profits surge in the third quarter, even as hospitals such as Indiana University Health are starting to see an increase in patient traffic.

“Hospitals have been bullish on volume increasing, but most of this appears to be the newly insured," wrote Sarah James, a health insurance analyst at Wedbush Securities, in a Sept. 30 note to investors. "As these costs are coming with premium revenue for insurers, we believe there can be a brief win-win situation.”

Indiana’s large hospital systems have yet to report their third-quarter results. But Indianapolis-based IU Health saw a 1.5-percent rise in ER visits at its 11 central Indiana hospitals in the third quarter, according to data obtained by IBJ. That increase came after ER visits had been down during the first half of the year.

Last week, Tennessee-based hospital operator HCA Inc. reported that admissions rose at its health care facilities 2.8 percent and ER visits rose 7.3 percent in the third quarter. Meanwhile, admissions of uninsured patients fell 14.8 percent.

Those figures reflect the impact of the roughly 10 million additional Americans who obtained health coverage this year through Obamacare’s expansion of Medicaid or through its tax subsidies for private health insurance sold on online exchanges.

In Indiana, the ranks of the uninsured increased by an estimated 98,000 people, as the Obamacare exchange attracted 128,000 people and about 40,000 more Hoosiers enrolled in Medicaid. Some of those folks may have previously been insured through their employers, some of which have ended their group health plans.

These newly insured customers have brought new revenue to health insurers like WellPoint—which signed up 769,000 exchange customers nationally—that has more than covered their additional spending.

“Yes, providers are experiencing more volume (outpatient), but it seems the increased volumes are from the newly insured,” wrote Jefferies & Co. analyst David Windley in an Oct. 9 report to investors. He noted that inpatient admissions, which involve far more dollars, are still declining overall, which should help WellPoint grow its third-quarter profits about twice as fast as investors currently expect. WellPoint will report its third-quarter results Oct. 29.

Referring to WellPoint by its ticker symbol, Windley wrote, “WLP had the cleanest [second quarter] results, has potential upside to 2014 guidance, and is profitably onboarding [Obamacare exchange] lives.”

But health insurance investors are wary that lower spending won’t last as unemployment has fallen and the economy continues to gain strength.

“We remain concerned that this win-win scenario will not last and that the pace of economic recovery could drive a slightly more rapid cost increase in 2015,” wrote James, the Wedbush analyst.

Investors assume the recent slowdown in health care spending has been driven mostly by the economy, rather than by Obamacare itself, as advocates of the law have claimed. If they are right, then economic growth should end the slowdown, and bring health care spending back to its historical above-inflation growth rates.

That’s also the view of the actuaries at the federal Medicare program. In a September article, they said spending growth of 3.6 percent last year would jump to 5.6 percent this year and then to 6.0 percent in 2015 and beyond.

“The combined effects of the Affordable Care Act’s coverage expansions, faster economic growth, and population aging are expected to fuel health spending growth this year and thereafter,” they wrote.

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