Issue link: https://www.e-digitaleditions.com/i/499026
18 BizEd MAY | JUNE 2015 ILLUSTRATION BY JAMES YANG Profits and Premiums MANY IN THE UNITED STATES object to a government-driven healthcare system, because they believe it isn't as e–cient or competitive as one driven by the private sector. But a recent study finds that a private healthcare system might be less competitive than many think. The study's authors include Francesco Bova, assistant professor of accounting at the University of Toronto's Rotman School of Management; Yiwei Dou, assistant professor of accounting at New York University's Stern School of Business; and Ole-Kristian Hope, Rotman's Deloitte Professor of Accounting. The group examined federal disclosure data on benefit plans from a sample of ful- ly-insured U.S. firms between 1999 and 2011. They found that in the free market, U.S. companies report lower profits when dealing with large health insurance companies with strong bargaining power. And for good reason: When companies show rising profits, insurance providers hit them with higher premiums. That is no small consequence, say the authors, given that the firms in this study paid a mean 29 percent of their net income on premiums. When large healthcare providers can exert such control over prices, the healthcare market is not "perfectly competitive." ¯Firms using large insurance providers were more likely to use discretionary prac- tices such as "write-downs," subjective estimates that can undervalue assets. When health insurers merged, companies were especially likely to report lower earnings. ¯The study points to the example of the 1999 merger between Prudential and Aetna, which was followed by downward earnings reporting among corporate customers in six U.S. states. The exception was Texas, where state government forced Aetna to give up some of its business to competitors as part of the merger. ¯The study also found that lower reporting can negatively impact areas such as stock price, accounting quality, and the cost of capital. "Additional costs to society may accrue following employers' attempts to reduce ine–ciencies in the health-care market," the authors write. "Employers (and their shareholders) may also be worse o© than if health insurance markets were perfectly competitive." "Health-Insurer Bargaining Power and Firms' Incentives to Manage Earnings" can be downloaded at ssrn.com/abstract=2438716. MARKETING OUTLOOK Top marketing executives expect their budgets to grow by 8.7 percent in the next year, indicating their high- est confidence in the market since 2012. That's according to "The CMO Survey," an annual report from Duke University's Fuqua School of Busi- ness in Durham, North Carolina. The 288 marketing executives who responded expect their spend- ing on marketing analytics to almost double in the next three years, from 6.4 percent of their budgets to 11.7 percent. That's true even though they report that they aren't using all of the data they currently have. Digital media will heavily influence their budgets over the next year, as these executives plan to decrease spending on traditional advertising by 1.1 percent and increase spending on digital marketing by 14.7 per- cent. Mobile marketing's share of their budgets will nearly triple, from 3.2 percent to 9 percent, and social media's share will more than double, from 9.9 per- cent to 22.4 percent. Even so, 13 per- cent report being unable to measure social media's impact, a rating that has not improved over time. "Integrating social media activi- ties with the rest of the company's marketing strategy remains a chal- lenge," says Christine Moorman, the survey's director. The survey's complete results are available at www.cmosurvey.org. 13% of marketing execs are unable to measure social media's impact research+insights