Economy Watch: UHC loses $1.4 billion in Q1 and California introduces $25/hr minimum healthcare wage
Episode 84 Recap of the FLATLINING Podcast
In this week’s episode, Ron, and Matthew focus on some economic news in the healthcare industry. Ron is calling in from his appearance at a Medical Group Management Association workshop in Mobile Alabama where he provided one of his signature talks on life inside the medical insurance industry.
Matthew kicks off the discussion on the continued fallout from the Change Healthcare cyber-attack, what it means in general and Ron’s take on what Wall Street seems to be saying with its reaction. Change Healthcare is a subsidiary of Optum, one of the two branches of United Health Group, the other is United Healthcare (UHC).
Ron provided a brief primer on what Change Healthcare does. As he explained it, they are an electronic clearinghouse that processes the payments between the service providers and the payers. Matthew said some of the fallout of the attack is affecting timely payments to providers and all this appeared to be affecting United Heath Group’s earnings. Matthew reported that United Health Group's total revenue for the first quarter of 2024 was $99.8 billion which is up 8.6% year over year. However, he said the company posted a $1.4 billion loss following the Change Healthcare attack.
Ron provided some perspective, noting that anytime you have a loss of over a billion dollars, it will make you take notice, but, he said, don’t forget that United Health Group had total earnings of over $91.9 billion in 2023. So, he said, it’s not like they couldn’t absorb the hit. The indicator to look for is how Wall Street reacted. He said, in general, Wall Street is asking if this incident was bad for the company. In the case of United Health Group, the stock prices increased by 4%. Ron concluded, “What that tells me is first of all Wall Street knew they were going to be a hit, but they also knew that United would recover from this hit and that the hit wasn’t nearly as big as what they thought it was going to be.” In general, he said that when a company posts this kind of a loss and their stock prices go up, it means it is not that bad.
Matthew asked Ron about the public perspective of United and what if any, type of public relations damage control they may do regarding this loss and the cyberattack. Ron said he did not think that they would do anything, and, in his opinion, they likely don’t think they need to. He pointed to recent testimony from United’s CEO who stated that it was a good thing that the cyber-attack happened while Change Healthcare was part of United because they had the resources to address it and was able to respond quickly. According to Ron the CEO also stated that it was likely that the attack would have happened whether Change Healthcare was owned by United or not. Ron took issue with these statements and pointed out that their system was down for weeks and conjectured that the reason the attack took place may have been because Change Healthcare is part of a large multi-billion-dollar conglomerate. In the end, he said, since the attack did not seem to bother Wall Street much, he concluded that United is probably not too worried about its public image, and that is what he found concerning.
Matthew asked Ron to explain. He summed up by reiterating his outlook as an economist that capitalism and for-profit competition often produce good results in a lot of areas. He used Apple Corporation as an example, stating that he did not fault Apple for making a profit and that they make a product that is good for consumers. The concern he said is not that United made $27 billion, it’s how they made it and what they had to do to make it that he has a problem with. He pointed out that United did not earn their profits by making a better product, they made it at the expense of their consumers and their suppliers, namely doctors, and hospitals. In his opinion, “I think their reaction to Change Healthcare is that they don’t really care what they do to the [healthcare] delivery system.” The reason to watch United he said is because they are so large, and the larger they get, the less they will care about what they do in the healthcare space.
Our team then dissected the impacts of California’s September 2023 legislation to increase medical workers’ pay to $25 per hour over the next several years. This law does not include physicians and nurses. Matthew set up the conversation by pointing out that labor shortages and costs are big concerns for providers at the same time that revenues are down due to Medicare cuts and the payers demanding reductions in reimbursements. Ron put on his economist hat and provided us with the impacts of minimum wage laws, explaining that economists look at things like this as a “control” injected into what otherwise would be a free-market economy and look at the positive and negative outcomes. One of those outcomes, he said is increased labor costs, a key driver of inflation. Minimum wage laws can also drive up unemployment he said as people get priced out of work. It also can cause people to enter into part-time work versus full-time, as employers avoid full-time employees as a way to avoid paying all the benefits of full-time employment.
On the positive side, the employee receives more income and spending power, it can increase tax revenue as people move into a higher-level tax bracket. Everything in economics is a balancing act between positive and negative outcomes, he said. Noting that $25 per hour is going to get expensive, he thinks the negative outcomes might outweigh the positive in this case. Additionally, Ron said, that when something like this happens at the state level, there is always a concern it will drive business out of your state. He countered that in this case it was less likely to happen as we were talking about healthcare, and he said, “All healthcare is local” but it’s still a concern.
Matthew shared that one local community tried to bar hospitals from making some of the actions that Ron discussed and was quickly squashed by a district judge. Ron said, though not a lawyer, that having a government dictate to employers those kinds of restrictions sounded unconstitutional to him. Matthew pointed out one analyst stated that Medicare and Medical, California’s Medicaid program, reimbursements could be possibly increased to somewhat cover the increased costs in the future. Ron explained that the increased costs had to come from somewhere and referred to the inflationary part of the discussion, stating that Medicare could increase but would not likely increase enough to cover the cost difference. He also said California could increase Medical reimbursement, but with California’s huge budget deficit, this action would just add to it. He also pointed out that states, unlike the federal government can’t print more money.
If those two things don’t cover the cost, the result Ron said, is that you will see providers limiting services to those with Medicare and Medicaid. He said he’s seen some provider-owned hospitals, mainly specialties, that don’t have emergency rooms limit access. Ron speculated that could create a kind of “two-tiers” of medical service if there is continued downward pressure on hospitals and physicians resulting in leaving Medicare and Medicaid patients by the wayside. Ron reiterated his desire for people to make a fair and livable wage but reminded us that anytime these types of controls are introduced, there are downstream effects, and some will not be good.
Matthew closed by asking Ron which components of the health care equation, access, quality, and affordability, will be impacted the most by this legislation. Ron thought that it could hit all three, explaining that it would make healthcare less affordable, and the increase in staffing costs could impact access and quality when there are staff reductions. Not to sound cold, he said it would be great for those who receive an increase in their paychecks, and he did not want to diminish that, but this legislation has the potential to possibly impact all three components of the healthcare equation.