Expert Perspective by Grahall’s OmniMedia Editorial Board

In his March 16, 2010 article for the Huffington Post (Insurance Executives: A Big Part of Our Health Care Problem) William Lazonick says:  “Among the most powerful and vociferous opponents of health care reform are the executives of publicly listed health insurance companies and their lobbyists… Corporate profits are necessary to fund the investments that generate higher quality, lower cost goods and services. But that is not how the largest corporate health insurers have been using their profits over the past decade. Rather, virtually all of their profits have been spent on buying back their own stock for the sole purpose of jacking up their stock prices.”

Let’s take a small step back and remember that the primary goal of publically traded companies is to increase stock price.   Shareholders purchase stock for this reason (and maybe for dividends), and the Boards of Directors at these companies are in place to ensure that shareholders’ interests (that being increases in stock price) are considered first and foremost.  Of course some shareholders are also executives and very likely ALL executives are also shareholders (think Venn diagram with a little circle representing executives in the center of a bigger circle representing all shareholders). 

Are stock buybacks bad or were they the wrong thing to do? As Matt Koppenheffer said in his September 21, 2009 article for the Motley Fool (Your Company Did a Terrible Thing):  “There are really only a handful of options for using the cash produced by a business: organically expanding the business, making acquisitions, paying down debt and improving the balance sheet, paying a dividend, and repurchasing stock…. [companies should] choose the option that provides the best return.”

And by this he means the best return to shareholders (please refer to the Venn diagram described above). 

Perhaps buybacks were the option that, at the time, provided the best return. And based on the increase in stock prices for the Health Insurance companies that Lazonick mentions, it looks like these buybacks helped to fuel some pretty strong stock price increases.
• For Aetna, from about $7 in January 2000 to its high of about $54 in November 2007
• For Wellpoint, from about $21 in November 2001 to near $90 in December 2007
• For UnitedHealth Group, from about $7.60 in January 2000 to about $50 in January 2008.
   
But again does this make it wrong? Well, as Lazonick so clearly points out, it appears that “…these health insurers increase[d] their profits by raising premia, excluding people with pre-existing conditions, and capping lifetime benefits… to do more stock buybacks.”

For Americans who were not fortunate enough to be part of the shareholder Venn diagram for these companies but rather “just” customers, the results of these decisions were not so positive and may call into question the applicability of this business model: publically traded companies providing essential health care services.  

Perhaps Health Care Reform should demand that every health care insurer establish the following as their mission statement: “A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so.” (Mahatma Ghandi)

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com