Monday, February 20, 2012

How's Fallon doing?

Back in June of 2010, Boston Globe columnist Steven Syre noted that Fallon Community Health Plan was in weak financial condition.

Fallon is not in dire shape, but it isn’t rock-solid either. The insurer’s risk-based capital, a key measure of financial security, stood at 271 percent at the end of last year. The ratio was 600 percent at Tufts Health Plan and 724 percent at Blue Cross Blue Shield of Massachusetts. Fallon’s own ratio two years earlier was 566 percent.

Fallon is one of the state's smallest health insurers, dwarfed by giant Blue Cross Blue Shield of MA, but even by Harvard Pilgrim Health Care and Tufts Health Plan.  What it has going for it is a strong market presence in Central Massachusetts.  It also has very favorable ratings from subscribers.  The latest Consumer Reports survey gives it a rating of 92 out of a hundred, putting it in the "US Top Rated" category.  Along those lines, too, it is ranked in the top 20 health plans out of almost 400 in the country by the National Committee for Quality Assurance and is the only health plan in Massachusetts to have been awarded “Excellent” Accreditation by NCAO for its HMO, Medicare Advantage and Medicaid products.  It has had a slight dip in membership in the last year, but not enough to merit concern.  Financial results are also improved and appear stable.

Fallon's CEO, Pat Hughes, is a very able person and, as you would expect, optimistically describes the company's prospects, citing its ability to be nimble and responsive to local concerns:  "Fallon is a jewel, in my mind. It has been innovative and creative in its marketplace for the last 30 years."

When asked if he will need a strategic partner as consolidation occurs in the health care world, he humorously replies, "Well, we were thinking of acquiring Blue Cross."

Like other insurers, Fallon gets hit hard on costs when patients choose to go to hospitals for routine tests compared to clinics.  Here are some numbers that illustrate this phenomenon:

You might think that, with these kind so pricing patterns, Pat would be pushing hard for a capitated regime to shift risk to providers and patients.  But no, he hasn't bought into the religious dogma of his largest competitor on that front:

The marketplace requires choice. As limited networks provide additional choice, it’s important to have those. In terms of global payments, I don’t think one size fits all. There are those institutions that are ideally suited for it. There are those that over time can move from volume-based fee for service to more of a global capitated arrangement. And then there are other situations where you might want to stay with fee for service.

But it is reasonable to ask the question of whether Fallon's market position is sufficient in the highly competitive and very changeable health care marketplace. With about 215,000 subscribers, Fallon is well below the number that I have heard from industry experts -- 2 million -- that is required to have sustainable operations in the health insurance world.  As in financial services, you need a certain size to have economies of scale in financial transactions, and the asset base to protect you from large market fluctuations.

The overall trend 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.

The need for a large asset base and earning capacity has been aggravated by recent state actions that limit premium increases for small business and individual policies. That action has explicitly made that business line unprofitable. In essence, insurers now have to raise rates on other market segments (a very difficult thing to do) or hope to make up the losses on investment income (impossible in this era of low returns) or simply have lower profit margins.

My Central Massachusetts friends express great loyalty to this long-standing member of the community.  But those friends, facing their own budget problems, are ever more sensitive to the issue of health insurance premiums.  The question for the next decade is whether Fallon's creativity, nimbleness, and connection with the community will help it offset the unsentimental forces of its industry, bucking the trend and prevailing as a home-based enterprise.  I think it is worth rooting for.

1 comment:

Barry Carol said...

Smaller insurers like Fallon are at a competitive disadvantage vs. larger insurers primarily because the larger companies can negotiate bigger discounts from list price with hospitals and large physician groups or smaller premiums above Medicare rates. If there were an all payer system, this problem would go away. In theory, all private insurers would probably pay lower rates than they do now under an all payer system but Medicare and, especially, Medicaid would probably have to pay more than they do now to make the system work. That’s unlikely given the current fiscal environment at both the federal and state level.

Regional all payer systems are the norm in Germany and Switzerland. In the United States, though, larger insurers resist the concept because they think they can negotiate better deals than their smaller competitors which should help to maximize their market share. In that environment, smaller competitors will, over time, either go out of business or need to sell out to a larger competitor in a consolidating industry.