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POLICY/HEALTH PLANS: Why Health Plans need to change their business model

A reporter called about the PNHP which is running single payer ads attacking Hillary, Barrack and John Edwards. Why are they doing it? Because they want to make sure those guys don’t give into the insurers. Realistically there will be a role for insurers in any reform scenario, so it has to be the right kind of role. And that means their role has to change, alot!

Why? Look at this quote

"[Senator Clinton’s proposal] would have negative implications for managed care companies, since it would limit their ability to manage risk in their most profitable book of business (individual and small group), likely causing margin compression."

– Morgan Stanley analyst Christine Arnold tellsAIS’s Health Plan Week

That is dead right and also dead necessary. The days of Golden Rule taking over United are not over by any means, but they need to end some time. The health plans have to start to be responsible citizens. That means telling Wall Street to go fish for now. Are you interested, Karen? The long term alternative is not pretty.

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8 replies »

  1. Christine Arnold is flat out wrong, and I, like jd, wonder what she’s up to because she certainly ought to know better.
    Right now, the most profitable segment in the for-profit health carrier business (and among the publicly traded firms, there are only 12 left: WellPoint, United (with Sierra pending), Aetna, CIGNA, Humana, Coventry, HealthNet, and the government-services-only quintet of AmeriGroup, HealthSpring, Centene, Molina and WellCare) is not small group and individual, it’s government services — Medicare in general, and Part D and PFFS in particular.
    In addition, there has been a coordinated trend away from risk-based business and into the ASO-based, fee-based end of the business. At United, for example, the company’s most profitable unit is Ingenix, its IT division, followed by Uniprise, its self-insured national accounts business. At Humana, in late 2003, just 26 percent of its commercial book was in ASO, consumer or individual health plans. Eighteen months later it reached 40 percent, and by the end of second quarter 2006, the three segments made up 55 percent of the company’s commercial line. CEO Mike McCallister’s stated goal is to migrate the company’s entire book out of risk-based plans and into fee-based and ASO business.
    If the route toward single-payor — or even a multi-payor model with universal coverage and community rating — is by having “carriers” no longer carry risk, and instead, just administer and compete for business on service, wake up and smell the French Roast! We are already most of the way there, at least in the publicly traded, for-profit sector.
    And I would read a lot into the fact that Humana, the company with the greatest stake in government-service business through its Medicare, Part D and Tricare plans is the one that has made the most progress toward being only fee-based in its commercial segment. Its leaders see the writing on the wall, and know what’s coming.

  2. JD:
    I accept your correction of my terminology of “avoidance”. However, I still maintain that a basic change of mindset is necessary if these companies, whatever one wants to call them, are to administer health care in a realistic and patient-centric manner. I honestly don’t think current employees and executives of health “insurance” companies think this way; they need retraining. I hope your first comment is correct, e.g. that the trend will move in the desired direction.

  3. “The health plans have to start to be responsible citizens.”
    That won’t happen voluntarily.
    “The main business of the company then becomes (1) payment administration, (2) serving the function of medical cost control in conjunction with the public/government interest, and (3) keeping its members healthier than the actuarial models predict through DM and wellness…”
    Good definition of single pay jd. Is that the role insurance companies and their investors want or will accept? I don’t think so.
    “But they still require that sickness happens in order to exist.”
    Like everyone else in the healthcare business. Not much incentive to reduce utilization or patient cost is it.

  4. jd anticipates that payers in Germany and The Netherlands are transforming themselves into health custodians..as a genuine Dutchman ,I can testify that he got it exactly right . For example, our national waiting lists have evaporated…simply because the payers have figured out that it is cheaper to send a knee surgery patient to Barcelona , accomodate your next of kin in a nice hotel than waiting for a slot in a Dutch hospital.On a more serious note : payers are investing now practively in all kinds of services to keep their risk pool healthy to the delight of our govt and employers … from healthcare to health and wellness ,including the elderly.

  5. Bev, it is not true that insurance companies are “fundamentally” in the business of avoiding risk. The very thing that gives them existence is risk. That is what an insurer gets paid to do: redistribute risk among a larger group to reduce the risk of any given individual. To say that insurers are fundamentally in the business of avoiding risk is like saying that computer makers are fundamentally in the business of not making computers. Or, it is like saying that life insurance companies are in the business of finding people who can’t die.
    I do see how it is easy to get confused, though, because insurers *are* fundamentally in the business of profitably taking on risk, and to do so they adopt a number of techniques to reduce the riskiness of who they insure.
    Insurers seek out healthy people in part so that there can be a balance to the sick and so the pooled risk results in an affordable cost per individual. The more healthy people they have, the cheaper their premium can be and still allow the insurer to take a haircut of 5% or so. And, if their total population is healthier than a competitor, they can steal business away from the competitor due to the lower premium.
    But they still require that sickness happens in order to exist. it literally does not make sense to say they are fundamentally in the business of avoiding risk.
    That said, there is a tiny fraction of health “insurance” which more or less seeks to avoid risk entirely. From what I can tell, they operate primarily in the individual market, and by definition they don’t actually sell much insurance at all, precisely because they avoid risk. What they sell are limited benefit policies that have relatively high deductibles and low caps on benefits.
    As my Matt mentioned and my previous post also described, in a well-designed multipayer UHC environment, insurers will not find it possible to profit by cherry picking. If the government ensures that risk is distributed among the insurers, then in a sense they aren’t insurers any more at all. It is the government that sets up a pool of pools, and in an important sense manages the risk.
    In the not-too-distant future the term “managed care company” may be significantly more appropriate than it is now, and “health insurer” significantly less.

  6. I also saw Christine Arnold’s quote and wondered what it is really about.
    When you look at the effect of universal health care (UHC) on the multipayer model, you have to look at how much business the insurers would gain first of all. At any given moment something like 1/7 of the population lacks insurance. In these UHC models, even if half of this group joined a government-run plan, that leaves 10-20 million who will start paying premiums to an insurance company (or whose employers will).
    Given that the vast majority of these people will participate in the individual or small business markets, they will be fully-insured rather than self-insured. This is an important point, because for the large for-profit MCOs (Aetna, United) and many of the Blues, half of their business or more is self-insured. That means all they do is administer, not insure, and they get paid about 1/5 as much per member to do so. So, gaining even 5% more new members who are fully insured can be a big deal, especially to the big players with a lot of self-insured business.
    That said, it is certainly true that the degrees of freedom insurers have to design plans, market and set rates will diminish under a well-designed UHC system. They will compete in a different world, and some fear this more than others. Some will find that their competitive advantages are threatened more than others. For example, non-profit insurers and regional insurers in general will not be very threatened by this. It is the national, publicly-traded companies whose current business practices will be most affected. It is only they who have pressure to meet investor expectations of 10% or more profit growth a year.
    The most radical change that may come down the pike is that insurance companies change from thinking of themselves as insurers (poolers of risk), to thinking of themselves as fiscal and health managers (efficiently distributing money, managing utilization and costs, reducing population risk pro-actively rather than through skimming). This is because in a well-designed multipayer UHC system, insurers (for lack of a better term) are ensured a risk-adjusted amount per member by the government. They aren’t rewarded for having healthier people select them, and aren’t punished for having sicker people select them. I’m pretty sure this is what is done in Germany and the Netherlands. When that happens, underwriting plays a minor role in supplemental insurance. The main business of the company then becomes (1) payment administration, (2) serving the function of medical cost control in conjunction with the public/government interest, and (3) keeping its members healthier than the actuarial models predict through DM and wellness, in order to keep the difference in profit.
    I think this is where the industry is going, and smart managed care executives will start positioning their companies to do well in this environment.

  7. The phrase “ability to manage risk” says it all. Insurance companies are fundamentally in the business of avoiding risk, which, in health care, means avoiding sick people. This is irreconcilable with providing health care in any model except, hopefully few and isolated, “episodes”. Similar to when your house burns down or your car is damaged in an accident. A small percentage of people will have a house burn down during their lifetime, but everyone will get sick/injured and die during their lifetime.
    I am not disputing that private companies can provide health care, but they have to do it with a mindset which is diametrically opposite from that of traditional insurance companies – e.g. minimizing their risk of episodes. A new type of company run by executives with a new attitude must emerge.

  8. We NEED change in the individual and small group market where the insurers are not bound by uniform (federal) rules of play. Bringing this portion of the insurance industry onto the same playing field as large group/employer-sponsored health coverage would benefit so many citizens.

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