ANALYSIS: Why the insurance industry needs Obamacare to stay in business

Introduction

If there is a group of people more anxious about how the Supreme Court will rule on the health care reform law than President Obama and the millions of Americans who are already benefiting from it, it is health insurance executives.

Not only have their companies been spending millions of dollars implementing the parts of the law that pertains to them — and most of them do — but they also have been counting on the law as very possibly the only thing that can preserve the free market system of health insurance in this country. This is why it is so ironic that defenders of the free market are the most vocal critics of the law and the ones hoping most ardently that the Court will declare it unconstitutional.

Health insurers have known for years that their business practices of excluding growing numbers of Americans from coverage and shifting more and more of the cost of care to policyholders are not sustainable over the long haul. That’s why their top priority during the health care reform debate was to make sure whatever bill Congress passed included the much-vilified individual mandate. And it’s also why the big insurance companies have been working almost frantically to reinvent themselves lately.

Cigna and Aetna recently became the latest of the biggest national firms to rebrand themselves and roll out new logos and self-descriptions. Cigna is now “a global health service company“ while Aetna is now “one of the nation’s leading health care benefits companies.” What this means is that these companies and their competitors have come to understand that the very policies that enabled them to make Wall Street-pleasing profits over several years has led to a health insurance marketplace that is shrinking. And as it continues to shrink, so will their profit margins.

Cigna and Aetna and a handful of other companies got to be the giants they are today largely by acquiring scores of their smaller competitors in the 1990s and 2000s. Their acquisition strategy now is very different because they know the glory days of being able to report profits every quarter that are greater than what they reported a year earlier, which shareholders demand, are over. So instead of acquiring other insurers, the big firms are now diversifying by buying data and care management businesses and, to the alarm of many consumer advocates, hospitals and physician groups.

They are doing this because they have failed miserably at expanding coverage and controlling skyrocketing medical costs, as they promised they could do as they were torpedoing Bill and Hillary Clinton’s health care reform bill two decades ago. Even though they hated many of the Clintons’ proposals, they recognized even then that government intervention in the health insurance business would be necessary, that we couldn’t rely solely on them or the free market to fix our broken system.

Here’s what Karen Igagni, who heads America’s Health Insurance Plans, the industry’s largest PR and lobbying group, told a Congressional panel in the fall of 1993:

“The need for national health care reform has been well documented … Universal coverage at broadly affordable cost becomes possible only when insurance risks are spread across a large community. Currently, most health coverage is priced using ‘experience rating,’ where high premiums are set for high cost groups and low premiums are set for low cost groups. Experience rating financially discriminates against populations that experience high costs: the very young, the very old, the chronically ill, and those with pre-existing conditions, such as diabetes.”

And here’s what Larry English, the former president of Cigna HealthCare, told that same Congressional committee:

“There are many specifics in the President’s plan we believe should be supported enthusiastically. Among them are universal coverage, portability, the elimination of pre-existing condition limitations, the elimination of cream-skimming and cherry picking underwriting practices, the use of community rating, a standard benefit plan and malpractice reform.”

When it became clear, however, that some of the regulations the Clintons were proposing might curtail profits, the insurers began to disown what they had told Congress. They embarked on a campaign to persuade the public that the “invisible hand of the market,” as English said in a speech the next year, would do a much better job of controlling costs and expanding coverage than the Clinton plan.

When the Clinton bill died in Congress, that invisible hand went to work. But it proved to be so ham-fisted that physicians and patients soon rebelled. As it turned out, people didn’t like being required to change doctors, as many of them had to do. And women didn’t like being forced out of the hospital within hours of having a baby or undergoing a mastectomy. So insurers had to ditch many of the practices that presumably would bring down health care costs.

The free-market solution the insurers came up with after the failure of managed care was to herd people into high-deductible plans, just as they herded us into restrictive HMOs 20 years ago. The problem, of course, is that the insurers have to keep increasing both premiums and deductibles to keep meeting Wall Street’s profit expectations. It doesn’t take a rocket scientist to see how that is not a sustainable strategy — unless, of course, the government requires all of us buy coverage and gives subsidies to people who can’t afford the premiums on their own.

Without the individual mandate, so loathed by free market lovers, the pool of people willing and able to buy coverage will continue to shrink, as will insurers’ profit margins. Over the coming years, that pool will become increasingly older and sicker, meaning premiums will soar. Insurers will begin to desert the marketplace. They will not go out of business, but, as their acquisition strategy shows, they will be very different companies.

Insurance executives know they will have to transform their companies even more rapidly — and get out of the risk business sooner rather than later — if the individual mandate is struck down. They have run out of silver bullets. As for those who believe the free market can work in health care just as well as any other sector of the economy, they will see, if the Court declares the law unconstitutional, that it simply does not.

Follow Wendell Potter on Twitter: @wendellpotter