W(h)ither Insurers?


The talk around the country among health insurance companies is that their insurance business is dying.

What is happening? First, the consolidations in other industries, resulting in large, multistate corporations, already mean that many companies self insure their employees. Even many local firms have large enough work forces that they can be self-contained risk pools. (One source I found says that in 2008, 89 percent of workers employed in firms with 5000 or more employees were in self-insured plans.) There is no sense compensating insurance companies for actuarial risk when your employee base is that large. Instead, the insurance companies or other firms are hired solely to administer the benefit plans.

For those insurance markets that still exist, the provisions for transparency under the national health care reform law, and the insurance exchanges that will be set up, will result in the commoditization of insurance products. That commoditization will drive down the profit margins that would otherwise exist in this market segment.

The result is that health insurance companies will become financial services organizations more than insurance entities. Think of them as another form of banking, where minimizing transaction costs becomes imperative, and where the use of derivatives and other hedges makes the difference in who makes money and who doesn’t.

This, in turn, also implies that scale matters. Like banks and credit card companies, the larger ones incur a lower cost for each transaction. Several years ago, I was told that the minimum size needed to be a successful insurance company was two million subscribers. That was before the national health reform bill passed.

What does all of this mean for the relatively small insurance companies that serve Massachusetts? The same trends apply, but they have been aggravated by recent state action that limits premium increases for small business and individual policies. That action has explicitly made thMA insurersat business line unprofitable.

What can Massachusetts firms do to maintain their profit margins?   (Yes, I know they are non-profits, but  even non-profits need a positive bottom line.) There are two basic approaches: One is to grow in size to reduce transaction costs. On that front, is it reasonable to expect some consolidation of companies in this state? (See chart with membership, courtesy of figures reported by Rob Weisman at the Boston Globe.)

The other approach is to find new lines of business. The large national companies are already exploring that. What valued-added services could Massachusetts insurers bring to the marketplace?

Paul Levy is the President and CEO of Beth Israel Deconess Medical Center in Boston. Paul recently became the focus of much media attention when he decided to publish infection rates at his hospital, despite the fact that under Massachusetts law he is not yet required to do so. For the past three years he has blogged about his experiences in an online journal, Running a Hospital, one of the few blogs we know of maintained by a senior hospital executive.

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16 replies »

  1. I’m curious what, if ahtnying, any of the plans being critiqued/discussed would do about an anomaly in health care coverage for same sex couples where one partner is covered by the other’s employer-provided coverage> The Williams Institute at UCLA Law School has published a study that summaries the issue:Unequal Taxes on Equal Benefits:The Taxation of Domestic Partner BenefitsBy M.V. Lee BadgettDecember 2007Employer-provided health insurance is the backbone of health coverage for American families. Most people who have health insurance get it through their own employer or a family member’s employer. Public policy encourages employers to provide health insurance by exempting that form of compensation from taxation. As a result, married workers who get family health insurance benefits get a double benefit they get health insurance coverage for their spouses and children and are not taxed on the value of that coverage. In sharp contrast, workers who have an unmarried domestic partner are doubly burdened: Their employers typically do not provide coverage for domestic partners; and even when partners are covered, the partner’s coverage is taxed as income to the employee. As a result, the taxation of domestic partner health care benefits sets up a two-tiered tax policy that costs many American families and their employers millions of dollars each year. This report estimates the financial impact of this extra tax on employees and employers.This study was funded through a generous grant from Merrill Lynch.

  2. “Mark and Maggie care to explain why Medicare is so expensive then?”
    Care to explain why private insurance is so expensive? Medicare is just part of a broken system and politically put in the worst of all positions, needing to continue pay providers what they want, and continuing to provide patients all the healthcare they want – with no premium increases. It’s a failed business model just as private healthcare insurance is a failed business model.

  3. if you go to state DOI pages the majority of licenses carriers in every state have under 2 million members. I would estimate 90% of all carriers in the country have less then 2 million people. To say 90% of carriers are failures makes no sense. I would argue most people in fact would say when viewed for quality and value the 90% is far more successful then the 10%

  4. Nate,
    Maybe things are different for hospital owned plans, in terms of required scale. I was referring to stand-alone insurance companies. I have heard this same number from many in the industry.

  5. As a 30-year veteran of the health care industry, I shudder when I hear terms like “single payer” thrown around.
    We need reform, but not destruction of the system. There is waste and mismanagement and that should be fixed first. Not putting the Insurers out of business.

  6. “Allergan also taught doctors how to bill for off-label uses, including coaching doctors on how to miscode Botox claims, leading to millions of dollars of false claims being submitted Herve leger to federal and state government programs,” Department of Justice Assistant Attorney General Tony West told reporters Wednesday.
    West also claimed Allergan paid kickbacks to physicians who used Botox off-label.
    However, Allergan said in its press release that the “misbranding charge is known as a strict liability offense, and does not involve false or deceptive conduct.”

  7. Paul that 2 million figuree is BS and meaningless. You don’t need anywhere near that many.
    Intermountain 500,000
    S H&L/ HPN had 700,000 before selling to UHC which had nothing to do with being successful and everything to do with cashing out.
    I could name a dozen hospital owned plans with well under 500,000 lives that would be considered a success by any meaningful measure.
    The comment doesn’t even pass the logic test. Why would you need 2 million lives to be successful? After 50,000-100,000 lives it means next to nothing. How many makrets are you serving? 10,000 lives in a rural town would be more useful then 2,000,000 apread across the country.
    Was the person that told you that even in the industry?

  8. Mark and Maggie care to explain why Medicare is so expensive then?
    Maggie can’t even define the word insurer. The only true insurers operate in the self funded stop loss market FYI.
    “profits rely, to a large degree, on avoiding sick customers.”
    While your at it how is it the carrers that run the high risk pools are usually the most profitable? I still have never seen you explain how you avoid sick people when small group is guarantee issue. I know your not one for answering facts but come on, you make no sense.
    “Conolidation in the insurance company will help rein in health care inflation because large insurers will have more clout when negotiating with large hospitals, not to mention drug-makers and device-makers.”
    Sounds like someone who has never worked in the industryand doesn’t know what they are talking about. If this was even half true then how do so many TPAs constantly out perform BUCA? If size and discounts was what mattered then every group would self fund with BUCA, instead there are a thousand + TPAs that beat BUCA everyday. I guess it takes more then three hours to learn this stuff Maggie.

  9. Oh, but I do agree that size will matter even more than before. There will be more consolidation. If I ran a health insurer and had less than 20% market share where I operated, I would be looking to merge. And unless my company operated in a state with a small population, if my company had less than 2 million members I’d also be looking to merge. And quite possibly even if my company did meet both those criteria I would be looking to merge.
    It’s also true that one of the main reasons for merging is to improve the ability to provide the latest services and systems to clients. The other, of course, is leverage over provider and drug costs.

  10. I’m a little surprised you left out care management and population health. Also, medical cost control mechanism.
    One of the goals of health care reform is indeed to make insurance itself more of a commodity. We have already begun moving towards a world of risk-adjusted premiums in Medicare and Medicaid, so that cherry picking is less profitable. With guaranteed issue, minimum MLR, and scrutiny over premium rate increases, it does indeed look like insurances is likely to be an even lower margin business than before, and insurers won’t be able to easily compete on the basis of risk selection. Thus, it will become more commoditized.
    But the whole idea of managed care was that insurers, by being at risk for costs, could add value by being smarter about controlling them than those who are paid by volume of care. Also, the scale at which insurers operate and the fact that they have data across many providers that a patient sees (whereas the providers have historically been atomized), meant that they were in a great position to do population health measures.
    Now that health information exchange is finally coming and ACOs may be on the way, atomization and perverse incentives of providers may dramatically drop over the next decade. As that happens, even care management as a key value-adding role of insurers has to be rethought. Not that it goes away, by any means. ACOs will need to have contracts with insurers that support care management, and they may find that insurers are natural partners for some things. It may even happen that in some markets insurers merge with large ACOs and form integrated delivery systems.
    Even if FFS payment remains, insurers do still at least in principle have the role of negotiating rates, engaging in utilization management, etc., to try to control costs. This is not at all commoditized by HCR and so some insurers could definitely develop a competitive advantage here…or rather, maintain advantages they already have. Hopefully, they can do a step better than that and actually do a better job constraining unit cost increases and utilization increases that don’t improve outcomes.

  11. This was a great post. Very informative and very useful. The insurances carriers will have to evolove or die, like everyone else. They have resisted it for so long, even with force at times, but invariably time erodes all fortresses. Love the hat, by the way.

  12. The ultimate consolidation would be single payer. This would give us all of the advantages of having more clout with hospitals, doctors, drug makers, etc. as well as removing the inefficiencies and abuses (avoiding sick people) of the small group market…
    … we can only hope.

  13. Thanks for a realistic, lucid appraisal of what will be happening to the insurance industry.
    Even before reform, the trend toward self-insurance was
    pushign the industry in the direction of becomign financial service organizations.
    Increasingly, the only true insuers were operating in the very inefficient individual and small group market where administrative costs are high, and profits rely, to a large degree, on avoiding sick customers. This is not a business model that adds value to health care.
    Conolidation in the insurance company will help rein in health care inflation because large insurers will have
    more clout when negotiating with large hospitals, not to mention drug-makers and device-makers.