Uncertainties Facing Big Insurers In Midwest

WellPoint Inc., the parent of Anthem Blue Cross and Blue Shield in Missouri, took a huge gamble when it dove headfirst into many of the new health insurance marketplaces around the country.

Aetna Inc. hedged its bets by entering a patchwork of federal- and state-run health exchanges, but skipped California and New York, two of the most populous markets.

UnitedHealth Group Inc., the nation’s largest health insurer, decided to participate in only a dozen or fewer exchanges in 2013. Given the current disarray on the federal-operated website, its strategy may prove wise — or overly cautious.

In business, it’s usually best to be first to enter and carve out a new market. Occasionally, being first can be a costly, even crippling, mistake. And the health insurance industry, hemmed in by the new health law’s underwriting rules and administrative spending limits, has not faced this level of risk for decades.

It’s far too early to identify which insurers will be winners or losers under the Affordable Care Act. Mired by weeks of computer malfunctions, the slow-motion rollout of healthcare.gov will only prolong the agony of insurance executives who have long grown accustomed to carefully controlled risk.

The latest wrinkle: President Barack Obama’s move on Thursday to rescind the cancellations of millions of policies that don’t conform with the new law.

It’s becoming clear now that it may take some time, perhaps until at least 2015, for key aspects of the Affordable Care Act to start working, including the new health insurance marketplaces, say health insurance brokers and consultants.

Despite the uncertainties, the major insurance companies are publicly taking many of the changes in stride.

The “big five” — UnitedHealth, WellPoint, Aetna, Humana and Cigna — recently announced strong third quarter results, and analysts are expecting modest gains overall in 2014. In those quarterly reports, the top five posted increased revenue; two — Aetna and Cigna — reported increased net income.

They’ve wrapped their arms around the idea that Obamacare, for better or worse, is the law of the land.

“The health exchanges are here to stay, and we will be part of them,” Steve Walli, chief executive of a UnitedHealth subsidiary’s operations in Missouri and the River Valley, said in a recent interview. “We certainly plan to participate in many of these exchanges for 2015. ... There will be a lot of people insured in the health exchanges who’ve never had insurance before, and we’ll have some attractive options for these people to consider.”

Treading Cautiously

Yet the law may unleash changes that could undermine the top insurers.

A Deloitte Consulting study, released in 2012, concluded that the new health law may significantly disrupt the insurance industry.

The law “could increase the market size for individual health insurance by more than five-fold by 2020, raising the number of individual policy holders to approximately 72 million in 2020,” according to the Deloitte study.

That larger individual market could entice banks, smaller insurers and large retailers to enter, Deloitte found. “The door is opened to a full-scale disruption of incumbent group carriers by smaller, more nimble upstarts.”

Wendell Potter, a former insurance executive turned industry watchdog and consumer advocate, also has speculated that the new exchanges may prove to be the undoing of major insurers.

In a Sept. 30 column for the Center for Public Integrity in Washington, Potter predicted the insurance giants will have a hard time competing against smaller players, including nonprofit insurers, in the exchanges. Many consumers, he wrote, will eventually conclude they don’t need a behemoth to serve as a “middleman” to health providers.

Potter, who worked previously as an executive for Cigna and Humana, shocked the industry in 2010 with his tell-all book, “Deadly Spin.” He contends the new law “will signify the beginning of the end of the health insurance industry as we know it.”

An Uncertain Frontier

Insurance companies have vast amounts of public and private data about consumers’ medical claims histories, but cannot predict with certainty whether enough healthy young adults will buy policies to offset older consumers and those with chronic conditions.

Many young adults may choose to absorb the first year’s small penalty — $95 or 1% of income, whichever is greater — rather than pay more than $1,000 a year for a low-cost, catastrophic health plan.

“For these new reforms to work, you need broad participation in the healthcare system,” said. Robert Zirkelbach, a spokesman for America’s Health Insurance Plans, a Washington-based industry trade group. “If young, healthy people choose to wait and purchase coverage when they need it, that’s going to drive up the cost of coverage for all.”

Vincent Blair, a health insurance broker in Webster Groves, questions how insurers will be able to absorb the cost of caring for the previously uninsured and tough to insure. “I don’t see how it works,” he said.

“Overwhelmingly, the people who are calling me about policies on the exchange are sick,” he said. “These are people on growth hormones at $4,500 a shot or who have rheumatoid arthritis and each shot costs $4,800. ... It takes a lot of healthy people to cover these shots. Is there enough underwritten business on the insurers’ books to pay for all that? Will that temper the blow?”

Insurers Push Back

Under the Affordable Care Act, the insurers cannot exclude customers with pre-existing medical conditions, and policies must also include “minimum essential benefits,” including maternity care, mental health care and preventive care such as mammograms and colonoscopies — costly benefits that were not previously required.

To stay profitable, insurers have designed products with higher deductibles and higher out-of-pocket limits. With more “skin in the game,” consumers are being nudged toward making healthcare choices that are cost-efficient.

Insurers such as Anthem have also become aggressive in narrowing their health provider networks to exclude hospitals and physicians who tend to charge higher rates. Winnowing providers can reduce an insurer’s medical costs, but decreases consumer options.

In Missouri, Anthem plans to exclude BJC HealthCare — which operates Barnes-Jewish Hospital, St. Louis Children’s Hospital and several other hospitals in the St. Louis area — from its network for 2014 individual policyholders. The other insurer on the state exchange, Aetna subsidiary Coventry Health Care Inc., is offering a tiered plan here: Consumers with a broad network including BJC HealthCare pay higher monthly premiums; those with a narrow network without BJC pay lower premiums.

Consumer advocates say that some insurers are taking actions that may harm consumers.

In a Nov. 6 letter, Connecticut Attorney General George Jepson asked the U.S. Department of Health and Human Services to “aggressively scrutinize” what he described as a UnitedHealth subsidiary’s decision to drop a significant number of doctors from its Medicare Advantage plans.

America’s Health Insurance Plans, meanwhile, has supported bipartisan legislation to delay implementation of the health insurance sales tax, which will collect an estimated $8 billion in 2014 and raise the cost of individual premiums. AHIP also has lobbied against federal cuts that could increase costs and reduce benefits of Medicare Advantage plans for seniors.

A Cheery Outlook

During an earnings call last month, top executives from WellPoint seemed buoyant.

“We remain optimistic about the long-term membership growth opportunity through exchanges,” Joseph Swedish, WellPoint’s chief executive, told Wall Street analysts, according to a transcript by Thomson Reuters. “That said, it will likely be some time before we can get an accurate picture of what our initial volume on exchanges could be in 2014 and what the resulting risk profile might look like.”

WellPoint plans to spend up to $100 million by the end of the year to market its new policies — once the federal government fixes its HealthCare.gov website to make it easier for consumers to sign up.

As their companies continue to thrive, top insurance executives are enjoying generous pay packages.

UnitedHealth CEO Stephen Hemsley, for example, received $13.9 million in 2012, according to the company’s proxy filing with the Securities and Exchange Commission.

Aetna’s chief executive, Mark T. Bertoli, was paid $13.3 million in 2012.

WellPoint’s former CEO Angela Braly received more than $20 million in 2012, the year in which she resigned in August. Swedish became CEO in March, after John Cannon served on an interim basis.

Can the insurers’ heady days last forever? Under the new law, insurers face “medical loss ratio” restrictions on their administrative expenses. They must spend at least 80% of premium dollars on medical care — or provide a rebate to customers. The rule is 85% in large group markets.

As the nation’s largest insurer, Minnesota-based UnitedHealth’s core strength is its high degree of diversification in providing coverage and management services to companies of all size as well as millions of seniors on Medicare Advantage plans, poor people on Medicaid programs and individual policy holders.

But would UnitedHealth and its rivals prefer to operate in an arena that has fewer uncertainties?

“We’re in a highly competitive business. Managing risk is not an easy thing to do,” Walli said. “(But) this company was built on risk. We love to manage risk, and we think we’re pretty good at it.

“Any one of my customers can go somewhere else if I try to charge too much,” he said. “And the Affordable Care Act has produced new forces of competition.”

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.