Monday, March 21, 2011

Insurance companies dancing without touching

A story in the Washington Post talks about health insurance companies seeking new lines of unregulated business as the profitability of health insurance falls and as more and more requirements are placed on that line of business as a result of the federal health reform law. Here's an excerpt: "Insurers have moved into technology, health-care delivery, physician management, workplace wellness, financial services and overseas ventures in wide-ranging efforts to mitigate the new rules imposed by the law."

I raised some of these issues several months ago, where I also suggested that a merger of the Number 2 and Number 3 Massachusetts health plans might be forthcoming. Well, they tried, but decided not to, as they announced a few weeks ago.

Meanwhile, Blue Cross Blue Shield of Massachusetts is clearly laying the groundwork to shed its non-profit status. And, really, why not? It is in no way a charitable organization of the sort envisioned in earlier years, and the constraints of being a nonprofit bind in a number of ways.

When the HPHC and Tufts merger fell through, the operative statement was: "We have now determined that we are stronger as individual competitors than one company."

I predict that will turn out to be a strategic error. In the new world order, scale matters. This statement is, to me, revealing in its own way: "Our operations are very different and, in many important aspects, not fully compatible without significant changes to existing processes and applications." In other words, they chose not to merge because it felt like it was not currently cost-effective to change. This suggests that the operations of the two plans as presently configured are not scalable. But if they don't merge, they will be left behind by those with stronger market power. For now, that is BCBS of MA. In the future, as the business becomes less about taking on insurance risk and more about other services, it could well include some major national players as well. Now, rather than later, would be a better time to consolidate assets and use the cash on hand to make the investments that will be needed to grab market opportunities in the future.


Anonymous said...

In 2002 BCBS of Maryland tried to become for-profit and be acquired by Wellpoint. They were turned down by the Md. Insurance Commissioner (report attached). I suspect many of the same concerns would apply to such an attempt by BCBS Mass. In the Md. case, the public was particularly enraged by a planned multimillion dollar golden parachute for the CEO of BCBS who was involved in arranging the deal.


Paul Levy said...

The current MA CEO is wise enough and astute enough not to ask for that kind of deal.

Barry Carol said...

I think the increasing interest in non-regulated or less regulated businesses among large health insurers is a positive trend. First, as Paul noted, technology and scale will be increasingly important in the healthcare industry of the future. It will be even more important for doctors, whose decisions drive most healthcare spending, to start to perceive it as part of their job to know and care about costs. To the extent that insurers, helped by technology, can help them do that in a simple, user friendly way, it’s a good thing too.

As for non-profit Blues interested in becoming for profit companies, it’s probably a reasonable option on balance and I don’t see much downside, especially as it relates to the cost of purchasing health insurance. While the non-profits don’t pay taxes on their net income and the for profits do, experts suggest that the for profit companies have slightly lower administrative costs as a percentage of premiums which roughly offsets the non-profits’ tax advantage.