Overpricing the Market: A Very Dangerous and Destructive Process

Do you know what happens when corporations overprice their products and or services? No! Well let me tell you. Corporations that overprice their products and or services create an organizational financial death spiral for themselves and their shareholders.

Once a corporation like a health insurance company or HMO overprices its policies a number of things begin to happen the most significant being that less people purchase their insurance. When the sales volume goes south, health insurers are forced to increase their advertising/promotional budgets and at the same time increase their premiums to maintain their profit margins. This action produces less sales because the premiums are overpriced for the market and the cycle repeats itself until the insurer implodes financially.

Lesson to learn: Do not overprice your service.

On 4/24/08 9:17 PM, “The Policy Center” wrote:

http://www.nytimes.com/2008/04/23/business/23health.html?_r=1&th&emc=th&oref
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Insurer Says Economy Has Dented Its Prospects

By REED ABELSON
Published: April 23, 2008
It is never a good thing if many of your customers can no longer afford what
you are selling.

The UnitedHealth Group, which announced disappointing first-quarter earnings
on Tuesday, said the weakening economy was causing fewer businesses and
employees to sign up for its health insurance. UnitedHealth, whose stock
fell sharply on the report, also cut its overall profit outlook for 2008.

“We are clearly being impacted by the declining economic outlook,” Stephen
J. Hemsley, the company’s chief executive, told investors Tuesday.

While he acknowledged the company’s own missteps, Mr. Hemsley said that
fewer employers — particularly small businesses — were offering health
coverage to their workers, and that when they did, fewer employees were
choosing to enroll.

As one of the nation’s largest insurers and the first to report earnings
this period, UnitedHealth’s results have raised anxiety about the industry’s
challenges. While some analysts say UnitedHealth has simply hit a trough in
the industry’s normal business cycle, others are worried about more
fundamental challenges to the insurance business model.

In recent years, despite soaring medical costs, insurers have made big
profits by keeping premiums well ahead of health care inflation. But
analysts say that business strategy may be reaching its limits, with
companies finding it harder to raise prices without losing substantial
numbers of customers.

“The market is not growing — it’s shrinking,” said Sheryl Skolnick, a health
care analyst for CRT Capital Holdings in Stamford, Conn.

The market for employer-purchased coverage remains a large one, accounting
for 158 million people. But Ms. Skolnick says that UnitedHealth, like many
insurers, has priced its product beyond the reach of too many people and is
now fighting with its competitors over a shrinking pool of customers.

Investors in insurance stocks have been particularly anxious since
WellPoint, another big player, warned last month that it expected
disappointing first-quarter earnings.

UnitedHealth’s profit report on Tuesday, which felt short of expectations,
started a sell-off of its shares, which carried over to smaller declines in
the stock of competitors like Aetna and WellPoint. Shares of UnitedHealth
fell $3.66, or nearly 10 percent, to $34.15, which was near the 52-week low
of last month.

UnitedHealth earned $994 million, or 78 cents a share, on revenue of $20
billion for the first quarter. Although that was a 5 percent increase in
earnings per share over last year, the company cut its 2008 profit outlook
by 40 cents, to $3.55 to $3.60 a share.

It cited, in part, the decline of its core commercial insurance business,
estimating it may lose about 700,000 customers this year. That would reduced
its core commercial business to about 10 million insured people.

The main issue facing UnitedHealth is how much it can protect its profits as
it loses customers for its traditional health insurance. “The issue for them
is growth, and where is the growth going to come from?” asked Les
Funtleyder, the health care strategist for Miller Tabak & Company, who rates
the stock as neutral.

Analysts disagree on whether UnitedHealth has already weathered the worst of
the business cycle, or is at the onset of what could be two to three years
of a difficult environment. Matthew Borsch, an analyst at Goldman Sachs,
thinks the competition for customers is likely to make it hard for insurers
like UnitedHealth to raise prices.

The economy makes it even harder, said Charles Boorady, an analyst with
Citigroup Investment Research.

But while Mr. Boorady said he expected more earnings disappointments from
other insurers — WellPoint is scheduled to report results on Wednesday and
Aetna on Thursday — he predicts the cycle will be on the upswing as soon as
next year, as profits stabilize. And while he says UnitedHealth’s shares
could continue to be a poor performer for a time, he judges them to be cheap
at the current price.

UnitedHealth has also struggled since the departure of the company’s chief
executive, William W. McGuire, who agreed to leave in October 2006 after
being caught up in an options trading scandal.

The company has received sharp criticism from many of its customers as well
as the hospitals and doctors with whom it contracts for care. Regulators are
also looking into some of the company’s business practices, including an
inquiry by the New York state attorney general into the UnitedHealth unit
that helps insurers determine how much of a doctor’s bill to pay.

It’s the litany,” said Ms. Skolnick, who argued that the company has
expanded into too many businesses to be well managed. “There’s too much
going on.”

On Tuesday’s conference call some of the company’s major shareholders raised
doubts about some of management’s decisions, arguing that UnitedHealth
should pay shareholders a sizable dividend on shares instead of buying it
back, or should consider selling some of its businesses that might be worth
more as separate companies.

“We have not executed well and have not executed well over the last two
years,” said Mr. Hemsley, who emphasized that the company would consider a
variety of moves.

Mr. Boorady said UnitedHealth had not been as receptive as it should be to
outside ideas, saying executives were “tone deaf to their customers and
their shareholders.”

And even if companies like UnitedHealth are not convinced that they need to
do anything fundamentally different, Mr. Funtleyder said, there is a chance
that the politicians will. For the insurers, that might not be a bad thing,
he said.

A new administration in Washington could decide to address the increasing
number of uninsured Americans by asking the private insurers to play a role.
The companies would benefit from a new pool of potential customers. “The
hail Mary may be that we turn to some sort of universal care,” he said.

Still, he recommends holding off on buying shares since he, too, thinks that
there could be a tougher environment ahead. “There’s no sense in buying now
if there’s more risk to come,” he said.

ttp://www.nytimes.com/2008/04/23/business/23health.html?_r=1&th&emc=th&oref
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You’re currently reading “Overpricing the Market: A Very Dangerous and Destructive Process,” an entry on The Policy Center

Published:
4.28.08 / 11am
Category:
Employer Health Benefits, Federal Government, Health Ins. Markets, Public Health Politics
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