What’s the Future for Private Health Insurance?

Last Wednesday, the administration announced changes to the Affordable Care Act’s requirement that health insurance plans must cover pre-existing conditions. The new policy allows individuals to purchase short term plans they can keep for up to three years that cover less, have lifetime limits and allow insurers to deny coverage at any time due to a pre-existing condition they discover.  This new rule goes into effect in 60 days.

Proponents of the policy believe it will give individuals a cheaper option that doesn’t require them to purchase coverage they don’t think they will need. Short-term plans can be purchased for as little as $25/month versus $393/month for the average ACA compliant plan that meets all the ACA’s requirements for qualified plans.

Opponents think the policy is ill conceived. They predict it will attract healthy young adults, leaving sicker and older adults unable to afford coverage elsewhere. The administration estimates 1.6 million will purchase these new short-term policies by 2022. Trade groups including the American Hospital Association, American Medical Association and others are opposed to the policy believing it will de-stabilize the individual insurance market (14 million) and force sicker and older to pay skyrocketing premiums or forego coverage.

Setting aside the politics of health reform that has divided Americans for and against the Affordable Care Act, the larger policy question is this: what role will private health insurance play in the future of our health system?

BACKGROUND

Private health insurance is a staple in the U.S. health system. Polls show the public associates health insurance coverage with access to the providers they prefer and a level of financial security. They trust hospitals and physicians more than insurers, but think insurers can be trusted for information about health costs.

In 39 states, legislatures subcontract with private health insurers to manage all or part of their Medicaid programs. And one in three seniors is enrolled in a private Medicare Advantage plan. Thus, combining enrollment in the privately-managed portions of Medicaid and Medicare with the individual and group (employer) markets, two in three Americans depends on private health insurance for access to the health system.

When the Affordable Care Act was conceived in 2009, health reformers recognized that expanded enrollment in private health plans was politically and practically the only vehicle by which increased access was achievable. The public felt healthcare needed reform, but a “government run” system was favored by only one in four voters. Though favoring universal access, focus groups showed voters believed a government run system would result in less choice for consumers, higher costs and a decline in the quality of care. A health system based on private hospitals, physicians and insurers had stronger support over single-payer alternatives like “the public option.”

Conservatives and powerful trade groups opposed “the public option” espoused by the Progressive Caucus in the House of Representatives. They deemed it a recipe for wasteful government spending and bloated bureaucracy. Borrowing from conservative think tanks like the Heritage Foundation, the Senate Finance Committee drafted its version of the law premised on expansion of the private insurance market driven by the law’s individual and employer mandates. Conservative policy wonks believed that the mandates would force people into the insurance market and reduce underwriting risks for their insurers.

The Patient Protection and Affordable Care Act (March, 2010) expanded private insurance enrollment through two programs: 1-Medicaid expansion whereby states could offer coverage to eligible individuals with income up to 138% of the federal poverty level (the federal government picked up 100% of the costs for expansion enrollment for 3 years scaling down to 90%) and 2-creation of state-run health insurance marketplaces for individuals with income between 138% and 400% of the federal poverty level and small businesses (the federal government pays 75% of the premium for eligible enrollees).

Since passage, the results have been significant: The ranks of the uninsured dropped to 9% from 16%; 33 states expanded their Medicaid programs, and enrollment in the marketplaces, after a bumpy start, leveled at 12 million in 2018. Private health insurance enrollment has grown 25 million as states have delegated management of their Medicaid expansion populations to private insurers, and marketplaces have attracted private insurer participation.

WHERE ARE WE TODAY?

In March, 2018, the Council of Economic Advisors released its assessment of the long-term viability of the private health insurance sector: “Despite significant initial financial losses in the individual market after the key provisions of the Affordable Care Act (ACA) took effect, health insurer profitability in the individual market has risen due to substantial premium increases, government premium tax credits that pay for those premium increases, and the large, government-funded, Medicaid expansion. Since ACA implementation on January 1, 2014, health insurance stocks outperformed the S&P 500 by 106 percent. Insurers remaining in the individual and small group markets seem to have recently accounted for ACA regulations and an older, more costly risk pool than they expected by charging higher premiums that have largely been covered by federal government premium subsidies. Stable year-over-year enrollment, despite large premium increases suggests a distorted market that involves large transfers from taxpayers to insurers. Large insurers, many of whom left the individual market, are profiting from the Medicaid expansion, which is largely provided through private managed care and paid for by the federal government. All health insurers can expect to become more profitable this coming year due to the recent tax reform.”

The facts are these: private health insurers have fared well since passage of the ACA. Enrollment and profits are up. Due to increasing underwriting risks and rising health costs, private insurers are consolidating and, in some cases, diversifying. Of the 858 U.S. private insurers, 42 now control 80% of the overall private market enrollment and 5 investor-own companies control 42%.  Each of the national plans now employ physicians and is pursuing unique strategies to strengthen their positions: CVS is acquiring Aetna; Cigna is acquiring Express Scripts; UnitedHealth continues to add delivery capabilities including the recent acquisition of the Davita Medical Group; Humana and Walmart are negotiating a strategic relationship, and so on.

Thus, private health insurance, especially those with large enrollment, is in a strong position as the next chapter of health reform unfolds.  Given the administration’s intention to relieve regulatory constraints on the sector and the public’s preference for private coverage, there are FOUR TRENDS HEALTHCARE MARKET-WATCHERS SHOULD MONITOR:

  1. The private health insurance market will grow. The administration’s loosening of restrictions around insurance plans coupled with enrollment growth in government (Managed Medicaid and Medicare Advantage), employer-sponsored plans, (especially high deductible plans with narrow networks) and in the individual market (high deductible plans for individuals and families, short-term plans) means sustained enrollment growth. Private insurers with large enrollments, strong brands, customized plan designs for individuals and groups and low premiums will have advantages. Thus, private insurers will continue to consolidate to gain scale.
  2. Regulatory oversight of private health insurers will increasingly default to states. The insurance commissioners in each state will determine solvency requirements, network adequacy, premium increases, essential benefits for qualified health plans and every dimension of insurer performance as well as market access by non-traditional players like Oscar and others. Non-conventional plans that limit provider options and offer lower premiums will predominate coverage growth.
  3. Private insurers will drive lower prices to keep their premiums low. Health insurance is a price sensitive purchase for individuals and employers. Studies show enrollees will not pay 5% more for a plan that includes their provider of choice if a cheaper option is available. Total health spending is estimated to increase 5.6% annually through 2025. Compared to the health systems in the 11 richest nations where utilization rates and outcomes are equal to or better than the U.S., our costs for drugs, hospital services, physician services and administrative overhead are 50-200% higher. They spend 11.5% of their GDP on healthcare; we spend 17.9%. So, insurers see significant opportunity to reduce these unit costs for everything from prescription drugs, hospital services, physician services, tests, diagnostics and administrative overhead. They will price their plans at 3-15% above the prior year’s (depending on the location and population), convince employers and individual policyholders that costs are excessive and avoidable and require providers to take risk for avoidable costs. They will increase their footprint in delivery, carving out services for patient populations wherein variability of treatment practices and total costs for care is high without corresponding evidence of value. And they will leverage technologies to enhance customer satisfaction, increase medication adherence and encourage their enrollees to compare prices.
  4. Private insurers will drive innovation in prevention and primary care. The rationale for large-scale investments in primary and preventive care by United (Optum), Aetna, Humana and others is that preventive health and primary care are investments that, when effectively managed, reduce demand across the health system. Studies show a 3:1 return on wellness offerings involving fitness, nutrition and others, and higher returns for clinical programs targeting passive consumers at risk for progression of their early-stage chronic conditions. Private insurers also recognize the conundrum of hospital emergency services: fewer than 10% of the 140 million visits to hospital emergency rooms involve a hospital admission and 70% do not involve an emergency at all. So, private insurers are purchasing primary care practices, building freestanding emergency and urgent care centers and implementing policies to penalize patients for unnecessary ER visits. For private insurers, doubling down on preventive health and wellness programs and strengthening primary care services are central to their long-term value proposition.

The availability of the new short-term plans is among many policies that empower private insurers to play a bigger role in the health system. For enrollees and employers, their bet is that escalating health costs will force increased price pressure on hospitals, drug companies and physicians and strengthen their position as the system’s price-control police. But nothing can be taken for granted: consumers and employers want better customer service from private insurers. They want plans that are customized to their needs, networks that include only the clinicians they want, a tight formulary with low drug prices and a brand that’s recognized for trust and value. That’s why private insurers can ill-afford to be complacent.

The opportunity for private health insurers is strong but success is not assured. As Amazon, CVS and others flex their muscles, private insurers will not escape scrutiny. Stay tuned.

Paul