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 that 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?
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Disease management, care coordination / case management, and corporate wellness would be logical next steps; there are some regional plans that have had financial success with these LOBs. However, this is an interesting frontier... perhaps the Wild West of health care. Wellness programs and disease management vendors court large employers with the promise of controlling costs, even claiming to lower overall spend. The reality is that these programs maybe cost-effective in certain populations, but never do they offer immediate / short-term cost savings. Even worse, these vendors are very loosely regulated, and companies rely on their own due diligence and RFP process to make their best guess at efficacy. Wellness programs do not require the rigorous evaluation other forms of care outside hospital walls do. Chronic disease is even more disconcerting; programs like BTE have proven savings. However, if offered only in a commercial setting (commercial plans would continue targeting large employers) these populations would remain in a controlled disease state, until Medicare eligibility kicks in. Then what… do we pass on the cost to an already overburdened payor? Disease management has to be continuous, employer populations have to be stable (with low turnover) for all to benefit… these conditions are typically the exception, not the rule.
It seems to me that the insurance companies have sealed their fate by not fulfilling one of their principal tasks, which is to constrain the exorbitant cost of health care. If some of these smaller carriers would chose to nitch themselves into products that do not attempt to sign up every health care provider, and instead try to differentiate on the basis of value, then they could effectively compete. Do not attempt to sign up the biggest, best branded health providers, but instead create a network of lower cost but high quality providers. Then they could provide something truly missing from the insurance market. The insurance companies have effectively become too lazy in their negotiations choosing to cave to the big providers rather than to walk away from the table when the cost to a provider is too high.
They could also tier their network of hospitals, passing the additional cost of care at more expensive providers on to the consumer. If their insureds feel they get better care at a Partners facility, let them pay the additional inflated cost of that interaction instead of being subsidized by their insureds who use less costly providers.
All would constrain the cost of health insurance and likely allow the smaller insurers to capture more of the market as cost pressures come to bear in what is an unsustainable, continued increase in health care costs.
P.S. What has risen the highest in percentage increase over the past decade of the various components of health care? Could it be executive compensation?
Sorry but Fallon Community Health Plan, when it was all one big Fallon (doctors, hospital, pharmacy, and insurance company) has already tried what is recommended above (and what Obamacare talks about piloting). It really turns out that Romneycare was all about putting the small guys like FCHP and I think the Springfield group out of business. Good job, Mitt. Wouldn't be surprised to see him running an insurance company when the president thing flops again.
-- Dennis Byron
Thanks, Bess. I hope you get really good grades! :)
I agree that the insurance exchanges will help commoditize the market, but which transparency provisions do you think will matter? I have a hard time seeing how they will have a real impact on the market.
Health insurers especially not for profits occupy a peculiar space somewhere between a public service entity (utility, operated for the common good) and a commercial enterprise. Their mission as a care intermediary places them in a highly regulated spot and also subjects them to vilification by politicians and the public.
There are however some things that they do well. Most health insurers know how to underwrite and price risk. Some health insurers have expanded their product offering beyond traditional health insurance to other related (and less regulated)insurance products.
This diversification has allowed them weather years of narrow or non-existent profitability in their traditional product lines.
Predictions of the health insurers' demise seems greatly exaggerated. Plus, we ought to be careful what we might wish for. Thanks for the thoughtful post, Paul. I commented on it here: http://vnaceo.blogspot.com/2010/09/remember-hmos.html
Insurers have increasingly used pay-for-performance measure incentives for hospitals. Is there a sense that these will continue to expand? And are their other rewards from them for quality, efficiency and transparency (e.g. in negotiations or accepted-provider decisions)?
Absolutely agree that health insurance companies will take a tilt toward the financial services side. But they will also have to provide value-added services and products. These products and services will have to serve to increase profits, both from a sale or reseller standpoint, as well as from a decreased health care costs standpoint. We're already seeing health insurers begin to offer "wellness platforms" (e.g. Shape Up The Nation) that encourage plan participant engagement in their own wellness, as well as that of their peers. Don't be surprised to see more of this type of software -- managing and encouraging the wellness of participants -- to get rolled out soon by insurance companies as they seek to decrease costs and increase--or maintain--profits.
I think insurance companies are missing a golden opportunity to re-imagine themselves as patient services companies. They could partner with both patients (oh, I forgot, "consumers") and providers to help coordinate care and find the best value providers for their subscribers. Porter and Teisburg go so far as to suggest eliminating network restrictions, and having providers compete on price and outcomes (value = outcomes per dollar spent) for each episode of care. I know people like to dismiss them as too academic,but this is the time for disruptive innovation, and let the imaginative survive.
nonlocal MD
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