OPINION: putting big health insurers in their place

Introduction

Aetna made the wrong kind of headlines in California a few days back. The health insurance giant said it plans to stop selling individual coverage in the state and would not renew the individual policies it currently has in effect. That decision means about 50,000 Californians will have to find another insurer by the end of the year.

State Insurance Commissioner Dave Jones said Aetna’s decision was disappointing because it will reduce competition, but Aetna — the third largest insurer nationally — has never been able to muster much of a market share in California’s individual insurance market. Three other insurance companies with a much longer history in the state — Anthem Blue Cross, Blue Shield of California and Kaiser Permanente — collectively control about 90 percent of the Golden State’s individual insurance market.

Aetna didn’t make a big effort to increase its share of that market because, like other big national insurers — most notably UnitedHealthcare and Cigna — it prefers to sell coverage to employers, not individuals. So Aetna’s decision didn’t come as a surprise to anyone who has followed the recent trends in health insurance.

In fact, it is a stretch to even call the big companies insurers these days. The number of people whom those companies actually “insure” has been dwindling for a decade. Their preference is to encourage employers and other large groups to “self insure” and then hire the insurance companies as administrators. If you look closely at the big insurers’ books of business, you will see their revenue from “administrative services only” (ASO) customers has been growing while cash from the selling of actual insurance has been falling.

Most Americans who have coverage get it through the workplace, but chances are very few of them realize that it is actually their employer assuming the risk of insuring them, not the company whose name is on their insurance card.

In an ASO arrangement, the employer pays a substantial fee to a company like Aetna or Cigna to negotiate contracts with doctors and hospitals and make decisions about whether or not an employee will actually get coverage for potentially life-saving procedures like transplants.

The trend toward ASO contracts shows that the big companies have become increasingly risk averse. It also explains why they are deciding not to participate in a lot of the online health insurance marketplaces — called exchanges — that will begin operations Oct. 1, as mandated by the health care reform law. Not only is Aetna passing on the California exchange, so are UnitedHealthcare and Cigna. And it’s not just California. These big firms have decided to participate in only a few state exchanges.

Some critics of the reform law are suggesting that if the big companies aren’t willing to sell policies on all the exchanges, Obamacare is somehow fatally flawed and will surely fail to live up to the promise of lower premiums through more robust competition among insurers.

But I think we’ll all be just as well off if the big companies stay out of the individual and small group market, which the exchanges are designed to serve. Those companies have overhead costs and are under constant pressure from their shareholders and Wall Street financial analysts to spend as little of their premium revenue paying claims as the law will allow. (Under the Affordable Care Act, insurers must now spend at least 80 percent of their policyholders’ premiums on health care.)

That means most of those who are selling policies to individuals and small businesses will primarily be nonprofit companies, including the new co-op health plans that have received start-up loans from the federal government. Without the need to price their policies to cover a substantial profit and pay executives millions of dollars every year, the nonprofits should be able to sell coverage that is more affordable.

That dynamic — along with greater transparence in pricing — already seems to be driving down the cost of policies that will be available beginning Oct. 1. I wrote recently about two insurers in Oregon that resubmitted lower rates to the state after seeing that their competitors would be charging considerably less for the exact same policies.

The same thing happened in the District of Columbia last week, where UnitedHealthcare has said it will sell coverage on the exchange. After seeing what competitors plan to charge, especially the nonprofits, the company quickly submitted new rates that were much lower.

The exchanges will do more to transform how insurance is sold in this country — and how much it costs — than any of us can imagine today. This time next year we’ll wonder why we waited so long to set them up. And we won’t miss those companies that refuse to take part. Believe me.