ANALYSIS: The end of health insurance as we know it?

Introduction

Aetna CEO Mark Bertolini caused quite a stir when he said at a Las Vegas conference a few days ago that the insurance industry as we know it is, for all practical purposes, a dinosaur on the verge of extinction.

Time to sing, “Ding dong the witch is dead”? Not quite, but the day when most Americans get their coverage from what we think of as an insurance company is close at hand. It won’t be long before most of us get coverage through either a state or federal government-run plan or a local nonprofit company. The big investor-owned corporations like Aetna and the companies I used to work for, Cigna and Humana, know that the days of making a killing off of basic medical insurance policies are over. And the companies have no one to blame but themselves and a fatally flawed, uniquely American system of providing access to care.

While Bertolini was by no means predicting that Aetna and its competitors were about to close their doors and get the hell out of our lives, he most certainly sounded the death knell for the standard business model insurers have followed for many years — actually insuring people.

“The system doesn’t work. It’s broke today,” he said. “The end of insurance companies, the way we’ve run the business in the past, is here.”

Bertolini ticked off a number of reasons why providing basic health insurance to Americans was no longer viable — changes in demographics and the economy and, of course, health care reform at both the state and federal levels. What he did not say was that the standard operating practices of the industry were simply not sustainable and actually contributed more to the demise of the business model than any external factors.

Ever since the health insurance industry came to be dominated in recent years by a handful of big for-profit corporations, insurers have actually been driving away customers and shrinking the universe of people they were willing to cover, because of the return on investment and the profit demands of the large institutional investors that own most of the corporations’ shares. It is because of those demands that insurers price their premiums beyond the reach of millions of Americans. It is because of those demands that insurers reject on average a third or more of all applicants because of “preexisting conditions.” And it is because of those demands that insurers have routinely canceled the coverage of thousands of policyholders when they got sick. Now you know why more than 50 million of us are uninsured. It is not because most of those people are being irresponsible. Most of them either can’t afford to buy coverage or can’t buy it at any price.

The number of people who get their coverage through the workplace is also declining because of shareholders’ profit demands. As recently as the early 1990s, more than 60 percent of small businesses were able to offer coverage to their employees. Now it’s well below 50 percent. Over the past two decades, insurers have methodically “purged” small businesses when an employee or dependent got sick or seriously injured.

Even though the population of the United States increased by more than 27 million during the 2000s, the number of people enrolled in managed care plans declined significantly, according to U.S. Census Bureau data — from 179.4 million in 2000 to 169.4 million in 2009.

As a former managed-care analyst was quoted as saying in Barron’s last October, “There’s no organic growth left in this business except for pricing.”

Another standard — but unsustainable — industry practice is shifting more of the cost of care from insurers to their policyholders, and from employers to their workers, through ever-increasing deductibles. You can’t keep making consumers pay more and more for their care and expect them to see the value of buying coverage. My former colleagues in the industry estimated, in private meetings, that the average American family could not afford to pay more than 16 percent of its total household budget for medical insurance and out-of-pocket deductibles.

These unsustainable business practices explain why insurers were so insistent that the Affordable Care Act contain a mandate that every American not eligible for a government program like Medicare or Medicaid be required to buy coverage from a private insurer and that those unable to pay the premiums be given subsidies by the government — subsidies that would go directly to the insurers.

Bertolini was correct in noting that the Affordable Care Act — which essentially will ban medical underwriting after 2014 as well as several anti-consumer practices — has accelerated the timeframe in which the industry’s current business model bites the dust. But reform was only an accelerant.

Over the coming weeks, I will be writing about how these companies are evolving and what that means for all of us.