Beginning of the end for major health insurers

Introduction

In this weekly column, former health insurance executive Wendell Potter offers commentary on matters relating to U.S. health care reform.

I’ve often said that the Affordable Care Act is the end of the beginning of reform. Starting tomorrow, October 1, 2014, that law will signify the beginning of the end of the health insurance industry as we know it.

As I’ve noted previously, my former CEO at Cigna said at a leadership retreat that what kept him up at night was the fear that big health insurance corporations might someday be viewed as unnecessary middlemen, that their “value proposition” would come under scrutiny and found to be wanting. That insurance companies would, to use his term, be disintermediated.

That day has arrived.

Most of the attention this week will be focused on the glitches that will inevitably occur when the switch is flipped and the long-awaited health insurance marketplaces (also called exchanges) finally go live.

Yes, there will be technological snafus, just as there will be some people upset to find that the relatively cheap policies they have now will be unavailable next year because they don’t meet the Affordable Care Act’s standards. As of January 1, 2014, the law outlaws policies pretty much guaranteeing that people will be underinsured if they get sick or injured — underinsured because those policies have inadequate benefits and outrageously high deductibles.

So expect to hear plenty of squawking, especially from those who have made a career out of opposing “Obamacare.” But before long, the snafus will be resolved and people will realize that the newly available coverage in the marketplaces will provide better protection and actually cost them less after the tax credits and subsidies are factored in.

One of the things apparent right off the bat is that some of the best deals will be offered by nonprofit health insurers, including the brand new co-op plans that will be available in about half the states. These plans will be lean and mean. They won’t have the enormous overhead costs of the big for-profit insurance corporations that I used to work for, and they won’t have to charge extra for coverage just to satisfy the profit demands of shareholders. They won’t have shareholders.

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If you’re wondering why Aetna, Cigna, Humana and UnitedHealth Group, four of the biggest for-profits, are not planning to participate in many of the marketplaces, it’s because they know they cannot be competitive and still satisfy the profit expectations of their shareholders.

Before long both Wall Street and Main Street will catch on to the idea that the big for-profits are bloated Goliaths that can and will be taken down by the new Davids of the insurance world. The value proposition held out by the bigs for years — that their armies of underwriters, marketers and “medical management” specialists are essential — will be blown to smithereens.

The bigs have to know this, and it explains why we are seeing some of their desperation tactics. Like the letter Aetna is sending to some of its policyholders encouraging them to renew early this year so they can avoid the “big changes” that are on the way.

“New coverage requirements, additional benefits, and many new insurance plans will leave many people with questions,” Aetna’s letter reads. “You can do something right now that could help you save on your individual insurance premiums for next year. It’s a one-time opportunity available right now.”

Aetna executives know, of course, that most Americans are not yet aware that they might be able to get much better deals on coverage in the new marketplaces. As you can imagine, Aetna’s letter makes no mention of those marketplaces.

The real reason the bigs are engaging in such tactics is to not to protect their policyholders from the possibility of higher premiums — or financial ruin if they get sick — but to protect their profit margins.

In addition to the new state marketplaces, private exchanges are springing up and attracting the attention of big employers that in the past have had no alternative but to do business with the large insurers. Now benefits consulting firms like Aon Hewitt are setting up their own private exchanges, which will force the big insurers to price their products more competitively. That, too, will lead to shrinking profit margins.

And as The New York Times reported last Friday, companies like GE are working directly with hospitals and physician groups to reduce costs and improve the quality of care for their workers instead of turning that responsibility over to insurance companies.

These are sea changes that will shift power away from big insurance companies, and thus erode the profits they make on both their individual and corporate books of business. It is just a matter of time before Wall Street recognizes that disintermediation has finally arrived and forces these companies to move more rapidly into other, more profitable lines of business, like data management.