The Three Challenges facing Private Health Insurers

The political gamesmanship about the Affordable Care Act and well-documented problems with the Healthcare.gov rollout have kept the health insurance industry in the spotlight. But being in the spotlight can be uncomfortable. The reason is simple: the health insurance sector is not well-understood and susceptible to misinformation. Ironic since 84% of us have some sort of coverage!

However, the biggest challenge facing the health insurance sector is not the uncertainty around Healthcare.gov. Though a source of understandable exasperation to plan operators, it’s not the biggest issue. Rather, it must address three major realities proactively and with complete transparency:

The private health insurance industry in the U.S. is profitable. The health care industry, overall, has had a great run since the passage of the Affordable Care Act in 2010, outperforming the S&P 500 3-year total returns by 24.89% to 15.04%. In the same period, investor-owned health insurers produced record profits: Zack’s Investment Services did not issue a “strong sell” or “sell” for any in the group in its July sector assessment, and many prominent “not for profit” plans made high profile acquisitions while passing through double digit premiums hikes. And third quarter guidance from WellPoint, Cigna, United and Humana supported a bullish view notwithstanding uncertainty about the rollout of the exchanges.

The sector’s profit margin is reasonable: 4.5% (Yahoo Finance) especially when compared to other health sectors (pharma 16.7%, device 13.7%, medical supplies 13.6%). But it’s not like other health care sectors in the eyes of consumers. Given slipping consumer confidence (down to 70.4 Conference Board Consumer Confidence Index) and declining household income (inflation adjusted income down 8.3% since 2008), increased out-of-pocket outlays for premiums, co-pays and deductibles intensify public attention to the sector’s administrative costs, medical management policies, executive compensation, global ventures, diversified investments and profits. If profits are earned by cutting hospital and physician payments, or withholding care that’s necessary and evidence-based, it is certain to face an uphill battle for public support.

The private insurance sector, therefore, faces unusual scrutiny about its profits, more than other sectors in healthcare. It must address the balance of its profits with purpose and value.

Most consumers who have private insurance coverage have mixed feelings about its value. Most consumers who purchase coverage know little about what they bought. Coverage and denial policies and procedures matter most to the 10% of their policyholders with difficult medical problems.  The pharmacy benefit matters most to seniors and those with complex medication needs, but not the majority. To the rest, it’s about out of pocket costs for premiums and visits, and the convenience of doctors and hospitals included in their plan. Almost 50% of consumers do not trust their health insurer (Peppers & Rogers Group’s 2012 Customer Trust in Healthcare) and only 44% of those with private coverage are satisfied with their plan—down 8% since 2009. (Deloitte Center for Health Solutions 2012 Survey of U.S. Health Consumers).

The value-gap for health insurance may be attributable to the historic structure of the industry’s commercial marketing, wherein employers were their primary customer and consumers “enrollees”. The size and attractiveness of the group insurance market justified efforts to focus on the wholesale market, and subordinated efforts to create and differentiate themselves in a retail market.  In all likelihood, the group market will shrink so for most insurers.  Demonstrating a clear, defensible value proposition to consumers is the second challenge as employers re-think their roles as middle-men and pass-through responsibility to their employees.

Those lacking insurance want it.  The uninsured associate coverage with access to physicians and hospitals, and the dignity associated they desire when scheduling an appointment for a test or visit. To the uninsured under 65, and to the majority of Americans, coverage is a right, not a privilege. But how to appropriate the services and pay for them is the rub. In its May, 2013 report, the CBO estimated the number of uninsured will shrink by 24 million by 2016 but that means 33 million will be without. The pressure to provide coverage for those without will not subside regardless of the success of managed Medicaid efforts in state and the new health insurance marketplaces.  And the hidden taxes passed through by hospitals and doctors to employers and individuals will hit small businesses and individual policyholders hardest.

The uninsured population will be substantial with or without the Affordable Care Act, and its costs will be a major issue. The third challenge to health insurers is to create a cost effective solution for the uninsured that offsets the hidden taxes paid now for the services they use. Otherwise, it’s only a matter of time before the government expands its reach via Medicare for all.

Jeff Zients’ affirmation Sunday that Healthcare.gov is improved, debugged of 400 glitches and now capable of handling 50,000 online applicants simultaneously, and the White House’ one-year delay of the small business exchange (SHOP) will not dim the intense spotlight on the health insurance sector. And the remaining glitches on Healthcare.gov will continue to frustrate health insurers.

Health plans have lots on their plate already in addition to Healthcare.gov: Will they re-instate cancelled individual policies and at what cost? In which states should they participate in the state-run marketplaces? How will premiums change for individuals and businesses? How can they cut costs in their Medicare Advantage programs given pending 3.5% annual cuts by CMS? What role will they play in Medicaid expansion? And how can they pass-through the annual non-deductible excise tax—$8 billion in 2014 increasing to $14.3 billion in 2018—to customers?

But a clear response to the three big challenges is the right place to start. Balancing profit with purpose,, demonstrating value to consumers, and finding a solution for the uninsured are the health insurance sector’s most pressing issues.