Los Angeles Times - 07.08.2019

C4 WEDNESDAY, AUGUST 7, 2019 LATIMES.COM/BUSINESS

Consumers are paying
higher interest rates on their
credit card balances than
they have in more than a
quarter-century, and the
Federal Reserve’s rate cuts
are no guarantee that they
will receive much relief.
The average rate on inter-
est-bearing card accounts
topped 17% in May, accord-
ing to Fed data, the highest
in the 25 years that the cen-
tral bank has been making
the calculation. Weekly data
based on a Creditcards.com
survey of 100 national card
issuers found an average
rate of 17.8% at the end of
July, another multi-decade
high.
Card rates rose from
long-term lows as the Fed
gradually increased its
benchmark interest rate be-
tween late 2015 and the end
of last year.
But card issuers pushed
up rates faster than the Fed,
with the result that the
spread between the Fed
benchmark and what card
borrowers pay, at just under
15%, has been wider only

once: in the third quarter of

2009, with rates on the floor.

Analysts point to two

groups that have contrib-

uted to the aggressive in-

crease in rates by card-issu-

ing banks: lawmakers and

customers themselves.

The Credit Card Ac-

countability Responsibility

and Disclosure Act of 2009, a

U.S. law designed to protect

cardholders from exploita-

tion, put limits on banks’

ability to raise interest rates

on existing balances. The

card issuers “can’t reprice

you once they sell you a card

— so they have to price

[more risks] in,” said John

Hecht of Jefferies, a broker.

Another factor, he said,

was that customers were not

focused on what rates they

would pay but instead on

what perks, such as cash

back and airline miles, their

cards brought.

“When you hear [bank]

management teams talking

about competition in cards,

it doesn’t take place in terms

of rates but in terms of re-

wards,” Hecht said.

Card rates are often set

by adding a premium to a

fluctuating index — most

often the prime rate, the low-

est rate banks make avail-

able to nonbank customers.

The prime rate in turn is di-

rectly related to the federal

funds rate, set by the Federal

Reserve.

After the central bank’s

decision to cut its bench-

mark last week, both JPMor-

gan and Citigroup, the top

two U.S. card banks by loan

volume, dropped their

prime rates by a quarter of

1%. This will flow through to

the rates paid by many card-

holders, at least initially. But

card rates and prime rates

do not move in tandem.

Brian Riley of Mercator, a

research group, pointed out

that since 2014, prime rates

had risen by 1.25 percentage

points, to an average of 5.5%,

while card rates were up 3.95

percentage points, more

than three times as much.

Card companies have

also found other ways to in-

crease what customers pay,

for example by using annual

fees, foreign transaction fees

and fees on balance trans-

fers, said Ted Rossman of

Creditcards.com.

“I don’t think this [Fed]

rate cut is a big gain to con-

sumers with credit card debt

— [their] rate is already high

and even if it goes down

slightly... [they] very well

might end up paying higher

fees in other areas,” Ross-

man said.

For banks, the wide

spread between the cost of

money and what they can

charge borrowers has made

the card business especially

profitable relative to other

kinds of lending, especially

given that default rates re-

main very low by historical

standards. At JPMorgan,

revenue from card lending

rose 11%, to $16.4 billion, in

2 018.

There is about $850 bil-

lion in outstanding credit

card debt in the U.S., accord-

ing to the Fed. That is a

record dollar amount, but as

a proportion of gross domes-

tic product, the figure has

declined from 6% to 4% over

the last decade.

© The Financial Times Ltd.

2019. All rights reserved. FT
      and Financial Times are
      trademarks of the Financial
      Times Ltd. Not to be
      redistributed, copied or
      modified in any way.

CITIGROUP ISthe No. 2 U.S. card-issuing bank by loan volume. The average rate on interest-bearing cards
topped 17% in May, a 25-year high, according to the Federal Reserve, which cut interest rates last week.

Emmanuel DunandAFP/Getty Images

Fed rate cut may not ease

soaring credit card interest

By Robert Armstrong

Stocks closed broadly

higher Tuesday as Wall

Street regained its footing

the day after the market had

its biggest decline of the

year.

The bounce pushed the

Dow Jones industrial aver-

age up more than 300 points

and ended a six-day losing

streak for the Standard &

Poor’s 500 index, though

that benchmark index re-

couped only a little more

than a third of its Monday

losses.

China’s decision to stabi-

lize its currency put in-

vestors in a buying mood.

The move helped allay some

of the market’s jitters over

the escalating U.S.-China

trade war at a time when in-

vestors are anxious about

falling U.S. corporate profits

and a global economy that is

showing signs of slowing.

“We’re getting a nice

move here, but if you look at

what the tone of the market

might be for the next few

days, it still could be under

some pressure,” said Jeff

Kravetz, regional invest-

ment director for U.S. Bank

Wealth Management. “Right

now investors are quite nerv-

ous, and the reason for the

nervousness is not only the

trade issue, but we’re also

seeing weakening economic

data, not only here, but over-

seas.”

The S&P 500 index rose

37.03 points, or 1.3%, to

2,881.77. It dropped 3% on

Monday, its biggest loss

since December.

The Dow climbed 311.78

points, or 1.2%, to 26,029.52.

The Nasdaq composite ad-

vanced 107.23 points, or 1.4%,

to 7,833.27. The Russell 2000

index of smaller companies

ticked up 14.67 points, or 1%,

to 1,502.09.

Stock indexes in Europe

finished sharply lower.

Investors have grown

more nervous about the ef-

fect that the U.S.-China

trade war could have on the

economy and corporate

profits. The conflict heated

from a simmer to a boil last

week, even as both sides re-

sumed negotiations.

But China’s decision to

let its currency stabilize

Tuesday suggests Beijing

might hold off from aggres-

sively allowing the yuan to

weaken as a way to respond

to U.S. tariffs on Chinese

goods. That offered some

hope that the sides might try

to keep the situation from

escalating further.

Technology stocks,

which bore the brunt of

Monday’s sell-off, accounted

for a big share of the gains

Tuesday. Apple and Micro-

soft each rose 1.9%.

Wells Fargo gained 1.7%

and Bank of America 1.2%.

Solid earnings results

helped lift other sectors. An-

imal health company Zoetis

climbed 7.6%, leading

healthcare stocks higher.

Retailers, communication

services companies and in-

dustrial firms also notched

solid gains. Foot Locker rose

3.4%. Energy stocks dropped

along with the price of crude

oil.

Bond yields had an early

gain, but then fell after a gov-

ernment report suggesting a

cooling U.S. job market.

The quarterly earnings

report season is in its final

stretch, and results haven’t

been as bad as initially

feared, though they’re still

down from year-earlier lev-

els. Profits for companies in

the S&P 500 are now ex-

pected to shrink roughly 1%.

That’s better than the nearly

3% drop expected earlier.

More than three-quarters of

the S&P 500 companies have

reported financial results.

International Flavors &

Fragrance shares tumbled

15.9% after the company is-

sued a disappointing earn-

ings report and trimmed its

forecast.

Novartis fell 2.8% after

the Food and Drug Adminis-

tration disclosed that it is re-

viewing the accuracy of data

on Zolgensma, a drug for

treating spinal muscular at-

rophy in children.

Gold rose $7.80 to

$1,472.40 an ounce. Silver

rose 6 cents to $16.41 an

ounce.

Index

Dow industrials

S&P 500

Nasdaq composite

S&P 400

Russell 2000

EuroStoxx 50

Nikkei(Japan)

Hang Seng(Hong Kong)

Close

Daily

change

Daily % YTD %

26,029.52 +311.78 +1.21 +11.58

2,881.77 +37.03 +1.30 +14.96

7,833.27 +107.22 +1.39 +18.05

1,883.50 +22.67 +1.22 +13.26

1,502.09 +14.68 +0.99 +11.38

3,022.30 -21.76 -0.71 +9.50

20,585.31 -134.98 -0.65 +2.85

25,976.24 -175.08 -0.67 +0.61

Major stock indexes

change change

Source: AP

MARKET ROUNDUP

Stocks rally a day

after big declines

associated press

customers and providers
often must jump through to
get claims paid impose
costly complexity on the
system, not simplicity.
Programs to manage
chronic diseases remain
rare, and the real threat to
patients with those condi-
tions was lack of access to
insurance — until the Af-
fordable Care Act made
such exclusion illegal.
Private insurers don’t do
nearly as well as Medicare in
holding down costs, in part
because the more they pay
hospitals and doctors, the
more they can charge in
premiums and the more
money flows to their bottom
lines.
They haven’t shown
notable skill in managing
chronic diseases or bringing
pro-consumer innovations
to the table.
Insurers cite these goals
when they try to get mergers
approved by government
antitrust regulators. An-
them and Cigna, for exam-
ple, asserted in 2016 that
their merger would produce
nearly $2 billion in “annual
synergies,” thanks to im-
proved “operational” and
“network efficiencies.”
The pitch has a long
history. The architects of a
wave of health insurance
mergers in the 2000s also
proclaimed a new era of
efficient technology and
improved customer service,
but studies of prior mergers
show that this nirvana
seldom comes to pass. The
best example may be that of
Aetna’s 1996 merger with
U.S. Healthcare in a deal it
hoped would give it access
to the booming HMO mar-
ket.

According to a 2004

analysis by UC Berkeley

health economist James C.

Robinson, the merger be-

came a “near-death” experi-

ence for Aetna. The deal was

expected to bring about

“millions in enrollment and

billions in revenue to pres-

sure physicians and hospi-

tals” to accept lower reim-

bursement rates, he wrote.

“The talk was all about

complementarities, syner-

gies, and economies of

scale.... The reality quickly

turned out to be one of

incompatible product de-

signs, operating systems,

sales forces, brand images,

and corporate cultures.”

Aetna surged from 13.7

million customers in 1996 to

21 million in 1999, but profits

collapsed from a margin of

nearly 14% in 1998 to a loss in

2001.

Even when they don’t

happen, insurance merger

deals cost customers bil-

lions of dollars. That’s what

happened when two pro-

posed deals — Aetna-Hu-

mana and Anthem-Cigna —

broke down on a single day

in 2017. The result was that

Aetna owed Humana $1.8

billion and Anthem owed

Cigna $1.85 billion in break-

up fees — money taken out

of the medical treatment

economy and transferred

from one set of shareholders

to another.

In reality, Americans

don’t like their private

health insurance so much as

they blindly tolerate it.

That’s because the vast

majority of Americans don’t

have a complex interaction

with the healthcare system

in any given year, and most

never will. As we’ve reported

before, 1% of patients ac-

count for more than one-

fifth of all medical spending

and 10% account for two-

thirds. Fifty percent of

patients account for only 3%

of all spending.

Most families face at

most a series of minor ail-

ments that can be routinely

managed — childhood

immunizations, a broken

arm here or there, a bout of

the flu. The question is what

happens when someone

does have a complex issue

and a complex claim —

they’re hit by a truck or get a

cancer diagnosis, for in-

stance?

“We gamble every year

that we’re going to stay

healthy and injury-free,”

Potter says. When we lose

the gamble, that’s when all

the inadequacies of the

private insurance system

come to the fore. Con-

fronted with the prospect of

expensive claims, private

insurers try to constrain

customers’ choices — lim-

iting recovery days spent in

the hospital, limiting doc-

tors’ latitude to try different

therapies, demanding to be

consulted before approving

surgical interventions.

Indeed, the history of

American healthcare re-

form is largely a chronicle of

steps taken to protect the

unserved groups from com-

mercial health insurance

practices.

When commercial health

insurance became insinuat-

ed into the American

healthcare system following

World War II via employer

plans, it quickly became

clear who was left behind —

“those who were retired, out

of work, self-employed, or

obliged to take a low-paying

job without fringes,” sociolo-

gist Paul Starr wrote in his

magisterial 1982 book “The

Social Transformation of

American Medicine.” The

process even left those

groups worse off, Starr

observed, because insur-

ance contributed to medical

inflation while insulating

only those with health

plans. “Government inter-

vention was required just to

address the inequities.”

Insurers wouldn’t cover

the aged or retirees, so

Medicare was born in 1965.

Insurers refused to cover

kidney disease patients

needing dialysis, so Con-

gress in 1973 carved out an

exception allowing those

patients to enroll in Medi-

care at any age. (So much

for addressing the “burden

of chronic disease.”)

Individual buyers were

charged much more for

coverage than those buying

group plans through their

employers — or were barred

from the marketplace en-

tirely because of their medi-

Private health insurance companies are worse than useless

CIGNAand Anthem said a merger would save nearly $2 billion. The deal failed, costing customers a bundle.

Matt RourkeAssociated Press

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