The Dilemma of Employer Sponsored Healthcare

As a follow up to my discussion of the Supreme Court’s deliberation on Affordable Health Care Act here, I would like to point to an article by Wendell Potter, who has held a variety of positions at Humana Inc. and CIGNA Corporation, including CIGNA’s head of corporate communications and chief corporate spokesperson.  Mr. Potter points out that:

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 [insurers.]

This provides an invaluable opportunity to reflect on the principles of insurance and how insurance companies can continue to profit and grow in the U.S. One of the dilemmas health insurers face is that some of the primary principles by which businesses become more profitable are not available to them – expansion of services and control of costs.  They have been unable to appreciably bring down the skyrocketing costs of U.S. healthcare and expand coverage. The current model, which excludes certain consumers from coverage only shifts more of the cost of care  to policyholders, increasing the cost burden on both businesses and consumers while reducing the incentive for businesses to purchase employer-sponsored healthcare. And the costs to individuals and small businesses are prohibitive.

Why The Industry Needs The Mandate

Large insurers like Cigna and Aetna grew in the 1990s and 2000s by acquiring smaller competitors. Because of the rising costs and danger of adverse selection in a shrinking pool of consumers, an acquisition strategy is not sufficient to provide increasing quarterly profits to shareholders.  Consequently health insurers are now diversifying by buying data and care management businesses as well as hospitals and physician groups.  The fact is that, without government support, the health insurance business cannot rely solely on free market dynamics to fix the very inefficient U.S. healthcare delivery system.

This is why the industry initially supported President Clinton’s healthcare reform program in the 1990s. Karen Igagni, head of the industry’s largest PR and lobbying group, Health Insurance Plans, testified to a Congressional panel in 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.

Larry English, the former president of Cigna HealthCare, also testified to the committee that he embraced universal coverage and other reforms.  The reforms only lost their support when some of the regulations proposed by the Clintons appeared to have the potential to curtail profits, and the industry endorced “the invisible hand of the market” as the means to bring costs down.

The free-market solution meant that insurers had to keep increasing  premiums and deductibles to keep meeting profit expectations. More restrictive high-deductible plans proved unpopular, an it did not prove a sustainable strategy.

Not a Question of If  – but When and How

Without the individual mandate, the pool of buyers and insurers’ profit margins will continue to shrink. As insureds become increasingly older and morbidity risks increase, premiums will become less affordable. Wendell Potter points out that insurers will have to transform their companies even more rapidly and get out of the risk business sooner rather than later.

The examples of other developed economies illustrate that the basic economics of health care demand government intervention of one kind or another. The questions are simply when and how.

Snap principle of health insurance delivery:

Prepare for sweeping changes