The effects of this change will have an impact on large insurers like UnitedHealth Group Inc. (NYSE: UNH), Aetna Inc. (NYSE: AET), Humana Inc. (NYSE: HUM), Wellpoint Inc. (NYSE: WLP), and Cigna Corp. (NYSE: CI), as well as smaller insurers like American National Insurance Co. (NASDAQ: ANAT) and Assurant Inc. (NYSE: AIZ).

Regulations on what constitutes a medical cost as opposed to an administrative cost are scheduled to be submitted to the US Department of Health and Human Services by the end of July. A further issue is whether companies can average their costs over all their subsidiaries or whether they will have to treat each subsidiary separately.

Individual policies are the chief drag on non-medical costs, with some companies having aggregate medical loss ratios, as the costs are now, below 70%. According to The Wall Street Journal, UnitedHealth, with nearly 400 subsidiaries, could have to pay $280 million in rebates in 2012 for premiums collected in 2011. That amount represents about 7% of 2009 net income. Humana could owe up to $63 million in rebates for the same period.

To ward off the sting of the new regulation, insurers are trying to include items that are now classified as non-medical costs as medical expenditures. These items include nurse hot-lines, smoking cessation and anti-obesity programs, and other similar programs. If the insurers get their way, the re-classifications could help prevent rebate payments.

Some also cite another reason for granting the re-classifications. Without them, insurers will just hike premiums until the medical loss ratios meet specified limits. Keeping the ratios low will tend to keep premium costs down over time. If the high ratios are maintained, insurers will simply raise premiums until fixed administrative costs, like executive salaries, decline as a percentage of premiums.

Smaller insurers, like American National and Assurant, have either already stopped offering individual policies or are considering doing so. The effects of the ratio change could even force some small companies out of business.

This is only the latest of the many changes we’ll see in health insurance and health care over the next few years. Fasten your seatbelts.

Paul Ausick

Aflac Inc. (NYSE: AFL) Raised to Overweight at JPMorgan.
Apple Inc. (NASDAQ: AAPL) Started as Buy at Stern Agee (late Monday call).
Assurant Inc. (NYSE: AIZ) Cut to Neutral at JPMorgan.
BB&T Corp. (NYSE: BBT) Cut to Hold at Deutsche Bank.
Bucyrus International (NASDAQ: BUCY) Maintained Buy but removed from Conviction Buy List at Goldman Sachs.
DreamWorks Animation SKG (NYSE: DWA) Cut to Market Weight at Thomas Weisel.
Hansen Natural Corporation (NYSE: HANS) Raised to Buy at Goldman Sachs.
Strategic Hotels & Resorts (NYSE: BEE) Raised to Outperform at KBW.
Teekay Corp. (NYSE: TK) Raised to Overweight at JPMorgan.
Textron Inc. (NYSE: TXT) Raised to Conviction Buy List at Goldman Sachs.
US Bancorp (NYSE: USB) Cut to Hold at Deutsche Bank.

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JON C. OGG

Sponsor: 26 Cheap Stocks to Sell – Cheap stocks have been on a tear recently, but nine out of ten stocks are circling the drain!

Aeropostale (ARO) Cut to Sell at Goldman Sachs.
Akamai (AKAM) Cut to Market Weight at Thomas Weisel.
Assurant (AIZ) Cut to Neutral at SunTrust.
El Paso (EP) Cut to Neutral at Goldman Sachs.
Starwood Hotels (HOT) Cut to Hold at Soleil.
SuperValu (SVU) Cut to Equal Weight at Barclays.

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JON C. OGG
October 9, 2009

Jon C. Ogg
July 17, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.