Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Squeezing the Managed Care Insurers
Transcript
- Lucas: So the July jobs report came out Friday, and the headline number was ugly — the economy lost twenty-three thousand jobs. But what caught my eye wasn't the headline. It's what's happening in health insurance. Luna: Health insurance? In a jobs report? I'm guessing you're not talking about the people who process claims. Lucas: Right, not the workers. The companies. The managed care insurers. They're sitting in this weird spot where the economy is barely growing — real GDP came in at one point five percent annualized — but medical costs are still climbing. Luna: So the classic stagflation squeeze, but for insurers. Costs go up, but they can't just jack up premiums because employers are squeezed too. Lucas: Exactly. And look, we talk about groceries and gas a lot on this show, but health insurance is the one bill most people can't avoid. So let's actually understand how these companies work in this environment. Luna: Before we dive in — and this is a little off the main road, but it's honest — we put this show together without ads, and that's thanks to a handful of listeners who chip in monthly at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small group, but it keeps the lights on and keeps us independent. No sponsor telling us what to cover. So if you've gotten something out of these episodes, that's the way to keep it going. But let's get back to the insurers. Luna: Okay, so walk me through the business model. How do these companies actually make money? Lucas: The core is simple: they collect premiums, they pay out claims, and the difference is their underwriting margin. But the kicker is they also invest those premiums before they pay them out. In a normal world, that investment income is a nice bonus. Right now, it's doing a lot of heavy lifting. Luna: Because the stock market is chugging along, even if growth is slow. Lucas: The S&P 500 is still near record highs — it's up a bit this week at seventy-seven fifty. But the real story is medical costs. The core PCE price index, which the Fed watches, ticked up in June. And that's the index that includes healthcare services. Luna: So you have this divergence: headline inflation is cooling, but the medical costs that insurers care about are still hot. Lucas: That's the whole ballgame. If medical costs rise faster than premiums, the insurers get squeezed. And they can't just raise premiums willy-nilly because employers are already pushing back. We saw that in the last few years — some of these companies took a hit on their medical loss ratios. Luna: And that's the ratio of claims to premiums, right? The higher it is, the less money they keep. Lucas: Right. And when that ratio climbs, Wall Street punishes them. Take UnitedHealth, for example. They're the biggest managed care company, and they've been dealing with higher medical costs, especially in Medicare Advantage. Their stock has been under pressure even as the broader market rallies. Luna: So what are they doing about it? Just eating the costs? Lucas: Not exactly. They're getting more aggressive about negotiating rates with hospitals and drugmakers. They're also pushing more costs onto patients through higher deductibles and copays. And they're shifting more risk to employers — offering self-funded plans where the employer takes on the claims risk, and the insurer just administers the network. Luna: So the insurer becomes more like a middleman, less like a risk-taker. That's a big shift. Lucas: It is. And it's been happening for a while, but stagflation accelerates it. When growth is slow and costs are sticky, everyone tries to offload risk. The insurers want to offload it to employers, the employers want to offload it to workers, and the workers end up with higher out-of-pocket costs. Luna: And that's why we see these headlines about how your rent isn't falling, but also your health insurance deductible keeps creeping up. Lucas: Exactly. The average deductible for a single worker has been climbing for years, and it doesn't stop when inflation cools. Because medical inflation is its own beast. Luna: Is there any good news here? I mean, the unemployment rate is still low — 4.1 percent. That's not terrible. Lucas: That's true, but the labor market is clearly softening. Job openings have been dropping — they're down to about seven point three million, which is the lowest in years. And average hourly earnings are barely keeping up with inflation. So people feel the squeeze, and they're more sensitive to premium increases. Luna: So the insurers are caught between the Fed's fight against inflation and the reality of medical costs that just don't bend. Lucas: And that's the 1970s echo. Back then, healthcare costs were rising rapidly, and insurers struggled to price that in. We had wage and price controls at one point, which made it even messier. Today we don't have controls, but we have consolidation — these companies are so big they have some pricing power, but it's not unlimited. Luna: So what's the takeaway for someone listening who just got their renewal notice and saw a ten percent increase? Lucas: The takeaway is that the increase isn't just because of greedy executives. It's the symptom of a system that's trying to price in the risk of persistent medical inflation in a slow-growth economy. And as long as medical costs grow faster than the general price level, premiums will keep climbing. Luna: So what could break this? If medical costs were to actually decelerate, would that help? Lucas: It would, but it's hard to see that happening. The drivers — an aging population, chronic disease, expensive drugs — are structural. The only thing that seems to move the needle is when the economy really tanks and people skip care. And we're not there yet, but if this slowdown deepens, you might see a dip in utilization. Luna: And then insurers would actually see their medical costs ease. But that's a grim way to get relief. Lucas: Yeah, it is. So the next few quarters are going to be telling. If the labor market keeps deteriorating, watch the insurers' earnings calls — they'll start talking about utilization trends. That's the canary in the coal mine. Luna: And if utilization stays high, premiums keep rising, and the squeeze continues. Either way, something has to give. Lucas: Exactly. And that's the thing — in a stagflationary environment, every industry is trying to pass costs along, but someone always ends up holding the bag. For health insurance, it's usually the patient.