News and Commentary

Wall Street Turmoil Makes Accessing Capital Difficult for Managed Care

The nation’s financial crisis is leaving no industry unscathed, and managed care is no exception. Although most companies are believed to have relatively little exposure to the Wall Street companies that were at the center of the turmoil, there are still several ramifications. John Gorman, who heads the Gorman Health Group, a consulting company, offers a view of the situation.

Managed Care: To what extent, if any, are managed care companies hurt by the crisis?

Gorman: It’s really pretty straightforward. The good news is they’re not a particularly capital-intensive business. And with a few exceptions, they don’t have much exposure to the firms that took a beating on Wall Street. The flip side, though, is that, like everybody else, they have a restricted ability to access capital, especially the publicly traded companies. And of course, their stocks are in the tank. Several got downgraded, Universal American, for instance.

MC: What about smaller plans?

Gorman: Yes, the tough spots will be small privately held plans, which will find themselves in a bind because of a lack of liquidity in the market and difficulty accessing investment capital. And companies heavily invested in the Medicare business need to be making some substantial investments in things like IT and other infrastructure, given a big increase in regulation of that program. So capital will be harder to access and more expensive.

MC: So where do they go for capital?

Gorman: There’s an opportunity for reinsurance carriers to rethink what they do for these health plans and be able to provide some of these services as alternatives to investment capital. They can help cover some or all the plans’ statutory reserves by basically swapping in reinsurer money for health plan statutory reserves. In effect, they’d be buying up their risk, which frees up capital the plan had in reserve and can use as operating capital.

MC: How will all this affect health care reform?

Gorman: It will have a negative impact on the prospects for health reform if the market stays in turmoil for an extended period. Health reform is really something the insurance industry is hoping will happen as a way of opening new markets on the 47 million uninsured, and if it looks like the government is bled dry because of a bailout or lingering economic crisis, the prospects for getting that done become questionable. — Ed Silverman


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