Why U.S. Treasury Ratings Matter To Health Insurers

Even as the Washington D.C suzerains try to demonstrate that they are capable of governance by hammering out a last minute budget compromise deal, there's still a likelihood that U.S. Treasurys could still eventually get "downgraded" by those murky rating agencies. 

If so, what's the big deal for current Treasury holders?  The Administration has made it clear that the nation's creditors will get their interest payments no matter what, even if means withholding payments for the hospitals that are caring for next year's Democratic voters.  Interest rates on future Treasurys may go up but that should be tolerable.  All is well, right?

Alas, notes the Disease Management Care Blog, it's not so simple.  That's because current Treasurys are bought, sold and therefore "priced" in a circulating secondary market.  A downgrade would make those existing Treasury's appear more risky, which could drive their secondary market price down.

For commercial insurers, including health insurers, this could turn out to be a big deal.  Much to the chagrin of liberal politicians and populists, health insurers need to keep reserves (the money held to pay future obligations) and a surplus (a financial cushion, just in case the reserves fall short).  Instead of just putting that all that money in a bank, insurers invest it in interest bearing vehicles and that includes Treasurys.  With a downgrade, their price, i.e. value, could go down, which, if pegged at a market price, could make it appear that the insurers' reserves and surplus have suddenly grown smaller. 

With an announcement of a downgrade, millions of dollars of insurer money in reserves and surplus could evaporate. That would make it appear they are at greater risk of not being able to meet their obligations.

It gets worse.  As Treasury prices go down, other commercial bond prices will follow. Treasurys' lower prices will ironically make the good faith and credit of the U.S. government comparatively more attractive for secondary market investors worldwide.  Holders of other types of bonds who want to sell will need to compete by lowering their prices also.  As other bonds go down in price, the value of the insurers' investment portfolios will contract further.

And that could mean that health insurers will have less room to move.  Since they already are a low margin business (latest number is 4.3%), the DMCB thinks a Treasury downgrade could be one more reason for commerical health insurers to not moderate their prices in the face of relentless health care cost inflation.

The DMCB offers some other asides:

An obviously overnourished New Jersey Governor Christie was recently hospitalized with asthma.  It turns out obesity is a distinct risk factor.  Hopefully the big man will be recruited into one of the New Jersey State employees' disease management programs (check out page 7 here) that is paired with a weight loss program.  In most programs, dealing with co-morbidities is standard fare.

To the non-surprise of family and friends alike, Amy Winehouse died on July 23.  Preliminary autopsy findings showed nothing amiss and toxicology is pending.  Assuming drugs were somehow involved, its no accident that it occurred at home and on a weekend day, which are a favorite place and time for recreational drug abusers.  If it was cocaine, the typical cause of death is cardiac arrest; it's not unusual for autopsies to be normal. if it was ecstasy, the cause of death is delirium followed by cardiovascular collapse.