Health insurers’ good year

A new Bloomberg Government study out this morning finds that health insurance companies have had a pretty stellar financial year. Returns on investments have surged ahead of general stock indexes and, as the above chart shows, anyone who invested $1 in health plans back in October 2008 has seen that grow to about $1.70.

How do health insurance companies prosper as fewer Americans have health coverage? It has a lot to do with more Medicaid and Medicare enrollees getting health care coverage through private health insurers. More from my colleague N.C. Aizenman:

Essentially, the private companies are hired to run managed-care plans as an alternative to the traditional fee-for-service plans provided by the two programs. Under the arrangement, the insurer receives a fixed amount from the state or federal authority ultimately responsible for a given Medicaid or Medicare population. In many cases, the insurer can then keep part of any savings it generates by managing the care of the covered population more cost-effectively.

The practice is attractive to states seeking to curb spending on Medicaid, which is funded with a combination of state and federal dollars. Privately run Medicare managed-care plans — called Medicare Advantage Plans — have also long been common.

That means huge business for health insurance plans. A recent report from Citi analysts estimates that states will release $40 billion worth of Medicaid contracts between now and 2014, meaning the trends that Bloomberg Government sees in this report will near certainly continue in the coming years.