Private Health Insurers Race to Justify Their Value

Includes: AET, UNH
by: Michael Steinberg

The New York Times in “Health Insurers, Poised for Round 2” examines the differing approaches of two of the largest private insurers to their potential disintermediation with President Obama’s healthcare reforms. Aetna (AET) is focusing on creating value through better employee health management for its large corporate clients. 20% of Aetna’s staff is dedicated to information technology and 20% are clinicians. This leaves only 60% to non-value adding sales, underwriting and administration. UnitedHealth Group (UNH) is concentrating on incubating additional services such as consulting to doctors and hospitals, and directly providing health services through acquisitions like Sierra Health Services. Sierra Health Services is Nevada’s largest physician group.

While most large private insurers have had some success in negotiating discounts through their large networks of doctors and hospitals, these efforts have been no match for escalating costs. The HMO revolt of the 1990s led the insurers to stop fighting costs and just raise premiums. It’s no secret that the recession has only exasperated the affordability of the products the insurers sell. The market share of commercially insured dropped from 78% to 68% over the last two decades, with 46M uninsured. The Times did not define what percentage of commercially insured was purchased risk-based insurance versus corporate self-insurance.

Aetna CEO Ronald A. Williams is embracing the new reality with statements like “we have to transform the system” and “there’s a huge opportunity.” UnitedHealth CEO Stephen J. Hemsley is far more sanguine with “open to reform” and “the issue is around how.”

Both companies have been feeding off the Medicare and Medicaid trough since 2003, with UnitedHealth accumulating 1.7M Medicare Advantage members. Now President Obama says that Medicare Advantage seniors are no healthier than others and wants to rein in the cost of the program. Both companies are profitable, but profits are shrinking and government pressure to lower costs is only likely to increase. Lower reimbursements from the government and shrinking private membership do not spell a bright future.

The companies could probably muddle through for a few more years if not for the possibility of Medicare open to all (under 65) and guaranteed issue for private insurers. The health insurance industry is concerned that Medicare has an unfair cost advantage and therefore could offer lower premiums. Secondly, they say mandated coverage for all is necessary to support guaranteed issue. The insurance industry does not say whether a mandate is required to widen the risk pool and prevent gaming the system, or is just a way of calling President Obama’s bluff.

During the Democratic primary campaign Obama pledged only to institute a mandate for children, not adults. Playing games with the mandate could be an unwise industry delaying tactic. It would be far wiser to let the government assume more risk, than trying to unravel the reform process over mandates.

Paying for effective clinical management might be a service the government is willing to buy. But selling risk-based business has fleeting value when medical underwriting is outlawed and you’re competing with the government for customers. Basically, insurers will have to become highly efficient administrators and chronic disease care managers to add any value. IBM’s Dr. Paul Grundy doesn’t believe the insurers are either now. They “don’t have a clue about providing what we really want to buy.” IBM wants cost effective care to help employees be more productive and live longer.

Let’s say Medicare for all becomes a reality in the near future; where does that leave the private insurance industry? The low hanging fruit would certainly be subcontracting portions of the administration from the government and providing supplemental coverage to consumers and corporate clients. On the administrative front, a great deal of horse trading has yet to take place on whether the private insurers will assume risk and how the risk should be compensated.

The more interesting space is supplemental insurance. This experiment might start being played out in the State of Washington. Washington is approaching a vote on a "Guaranteed Health Benefits" plan which would provide catastrophic coverage for medical costs over $10K to all residents via a payroll tax. Employers and consumers would have to purchase coverage for routine care in addition if they desire. Both policies would be administered by a single private insurer for each resident.

I believe that in a Medicare for all world, the free market for supplemental care could be even more robust and profitable than in the current medically underwritten world. The private insurers should concentrate now on the delineation point between coverage that can be purchased from Medicare and supplemental coverage purchased from private insurers. Standards will need to be set for deductibles, co-pays and co-insurance.

Fear not and resist not private insurers, you will actually get richer selling a new suite of services and risk mitigation to government, employers and consumers. Just think about private insurers selling coverage for drugs that the government does not consider cost effective or to move to the head of the line for rationed noncritical operations. It’s time to enthusiastically embrace the future as your current business model is dead.