The Future of Fully-Insured Health Plans
A candid personal health reform insight from SPBA President Fred Hunt

I first forecasted the probable restrictions on health insurance companies plus ramifications on employers who buy fully-insured employee health coverage.  Since then, I have received requests from employers, agents, brokers, TPAs and others to give a speech to explain the future for fully-insured health plans compared to self-funding.  Please consider this a “virtual speech”.

I predict health insurance companies will withdraw from the US market within a year or two.  Sadly, insurance companies became the political scapegoat of health reform, and so, many of the reforms spotlight insurance companies for limitations & requirements that are guaranteed losers. It simply will not make sense to insurance companies and their investors & owners to lose hundreds of millions of dollars.

For example, the Median Loss Ratio (MLR) requirements will limit insurers to only 15% of premium dollars for non-medical expenses (20% for individual policies).  That pretty much cuts out brokers & agents and many of the top-heavy operations of insurance companies…unless those insurers do like airlines and start adding all sorts of separate add-on costs.  However, employers will resent the extra costs as simply more expense.

Meanwhile, States are being given millions of health reform dollars to beef up their capacity to second-guess and deny premium levels.  In most cases, the level of premiums that will be approved or rejected will be influenced by politics, not actuarial or market costs.  One state official described the result for insurance companies as being “a train wreck”.  So, insurance companies will not be able to set premiums at levels their actuaries say are needed.

Insurers will be able to participate in state exchanges.  However, Massachusetts ’ existing program is the model, and the major insurance companies in that program each lost tens of millions of dollars just in the first quarter of 2010.  What insurance  company wants to stay in a market where they are losing tens of millions of dollars every few months.

Sadly, there are more and more restrictions & disincentives for health insurance companies in health reform and the emerging regulations.  It becomes an unsustainable no-win marketplace for insurance companies to continue to sell employee benefit health coverage.  

What is going on is sad and unfair…but it is now entrenched, and health insurance will disappear just as many car companies found it too hard to compete in the marketplace, and their product disappeared.  On the brighter side, about a year ago, several insurance companies foresaw the possibility of the market in the US for fully-insured health policies & plans disappearing for whatever reasons.  Those insurance companies began to research alternative markets if they withdrew from the US market.  That research has yielded promising results in several Asian & European countries, where citizens are impatient with their government-run health coverage, and are willing to buy their own coverage.  Insurers expect little or no government interference such as premium amounts, HIPAA, COBRA, etc. etc. in these foreign countries.  So, fully-insured health plans will survive, just not in this country.

What about self-funding?  By definition, self-funded plans, have no profits, most have fiduciary protections,  so the punitive restrictions forced on health insurance companies do not apply.  Also, there is much more control & flexibility for employers to design and administer their plans for the wants & needs of each particular workforce.  So, the kinds of controls, limits and governmental second-guessing are not involved.

Don’t get me wrong, everything involved in health is going to be a bureaucratic hassle and intrusive for medical providers, health payers, employers and workers.  Self-funding is no exception, and there will be several new added required or desired administrative services for employers to pay.  However, think of health reform as an obstacle course for self-funding, but a deadly minefield for insurance companies.

Insurance companies had already been delving into offering self-funded plans and providing administrative services only (ASO).  They can continue in that market, although, the increase in the quantity and sophistication of administration and added services is going to require re-tooling from the very different thinking & laws of insurance law to the very different employee benefits & ERISA law.

What about grandfathering and the President’s frequent promise “if you like the coverage you have now you can keep it”?  Grandfathering is an illusion.  It is temporary and does not protect from the most demanding requirements.  Also, it is very delicate.  Many logical or necessary changes to a plan will terminate grandfather status.  So, no one should be under the illusion that grandfather status is worth much or will protect for very long.  So, grandfathering should not be the decisive factor of anyone’s benefits planning.

Fred Hunt
SPBA President

I began my employee benefits career as a young eye witness when ERISA was being drafted and shaped in 1974.  At that time, almost everyone forecast that ERISA would spell the end of employee benefits, which is why insurers and others worked hard to avoid inclusion.  I did not feel that it was the end.  That lesson has taught me not to declare drastic outcomes of every major health reform & mandate since.  This insight about the future of  health insurance companies is my first dire forecast, and is mostly based on dollars & cents business survival factors for insurers.  No business can afford the endless hundreds of millions of dollars of losses being forced on insurers.   This is not gloating.  This is a sad situation.

SPBA is the national association of Third Party Administrators (TPAs) who provide comprehensive ongoing services to client employee benefit plans & employers.  It is estimated that 52-55% of US covered employees are in plans using some degree of services from such TPAs.  SPBA also achieves unique perspective, because clients include every size & format of employment , and every form of funding (self-funding, insured, HMO, CDHP) are provided by some SPBA members, so there is no us-versus-them slant.  We are simply seeing a sad historical event as an era ends.

Editor’s Note: The following was received from a physician friend of ours in San Antonio:

Some who have fought with insurers over the years would cheer this development.  But with what will they be replaced?  Be careful what you wish for.  Government intervention into this ‘business’ will NOT be good for providers or patients.  Of that I am certain.

 If true, this has serious implications for our existing managed care contracts.  Who will be the payers that will replace the current insurers?  If it’s a government entity or government controlled entity, they will quickly dictate the terms and the fees, and that will be that.  Then it will be the efficient providers who will prevail.  Everyone else will go out of business, and have to merge with the efficient groups. 

The shift is beginning to occur.  Right now, two existing large Cardiology groups in San Antonio have either gone bankrupt and/or are in the process of being purchased by hospitals.  The Medicare fiasco has brought significant cash flow problems to practices that are heavily dependent on Medicare such that many of them are having to borrow money to meet expenses.  A cynic might argue that there’s a method in the madness that Congress is going through right now with the lack of an SGR fix.  It may be having the intended effect of wringing out some of the inefficiencies in medical practices. 

 Also, the move for hospitals to acquire specialty medical practices is being driven by higher reimbursements for procedures in a hospital setting (yes, I know, go figure), and what everyone believes will be the evolution of the ACO’s, whatever that will end up looking like.

 We live in interesting times.  In 3 years, the healthcare system is going to look entirely different than it does now.  And physicians will be along for the ride.  Get ready, everyone.  It’s going to be bumpy.

We also received this response from a stop loss carrier: 

Good article, I am attending a health conference, and they too noted that it would not be worth the expense to stay “grandfather”.  It would cost too much. Beware of consultants who push this direction ,   As of now SL appear to be in good position.  However once the “O” figures it out he will come after us.

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