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Disrupt the US health insurance business model

Let Washington fight a tug-of-war over how much or how little of the recently passed federal health care legislation gets enacted. I’d like to step away from the politics and talk about the business model for the health insurance industry, why it needs disrupted and how to accomplish just that.

With US health care costs far exceeding that of the rest of the world and health status outcomes mediocre at best, our health care system is ripe for disruption. The insurance industry business model is one lever for accomplishing this. I’m sharing my thoughts here hoping to get your feedback on what’s right and wrong with my thinking. (Note: I am a political independent, seeking pragmatic solutions, whichever political party provides them.)

Health insurer profitability is driven by a number of factors:
  • Accurately assessing and pricing risks of insuring a pool of people
  • Securing competitive provider contracts and prices
  • Cost effective, technology-driven administrative processes
  • Exercising pricing power over small and mid-size employers and individuals, and
  • Getting rid of bad health risks whenever legally feasible.
The federal reform changes some of these elements e.g., insurers can’t kick sick people off the rolls, they must accept children with pre-existing conditions, they have to spend a certain amount of the premium on health-related expenditures and small employers can pool purchasing more so than today to secure more competitive pricing. But the basic insurance industry business model stays in tact.

An adverse side effect of the current insurance business model is that insurers do not compete for insured business on the basis of improving health status and lowering the long-term costs of health care. In fact, because there is enough churn in covered pools year to year due to dramatic pricing increases, insurers have a vested interest in delaying care so that the “cost” of delayed care accrues to the next insurer.

There is one exception to my description. In the exception rests the keys to disruption. Some large employers self-insure (or self-insure up to a very high dollar outlay) as they are large enough for the good and bad health risks in their pool of covered lives to average out and they’re willing to take the risk and invest the time to not pay an “insurance premium” to the insurer. Health insurers sell administrative services (provider contracts, benefit administration, etc.) to these employers, offering innovative plan designs that encourage employees to make value-based health care decisions and improve their health status. In other words, they complete on value, arguing “We deliver the best overall long-term value for your health benefit spending?” Their solutions for example often include individual risk assessments, health savings accounts, free primary care, case management for chronically ill, etc. Self-insured employers welcome these ideas as they have a keen vested interest in long-term health status, as health status drives future health care costs.
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Insurance-only companies like United Health Care, alliances of self-insured employers like The Alliance in Madison, Wisconsin and vertically integrated insurers compete on value for self-insured employers contracts. Competition on value has led these solution providers to innovate in ways that stretch self-insured employers health benefit dollars e.g., not paying for provider mistakes, rewarding higher quality providers who do the right thing at the right time, paying for episodes of care rather than procedures, etc. In fact, many of the innovations the business community seeks in health care policy first appeared in the self-insurance market.

The data shows that the self-insured employers are winning at controlling health care costs relative to the rest of us. Insurers’ innovations and the dogged determination of self-insured companies’ HR leaders and CFOs are responsible. In other words, a long-term cost focus on the part of self-insured employers plus thoughtful plan design and services from the insurers and alliances spells relief.

How could we make more of the health insurance market work the way that it works for the self-insured companies?

Why not create a single pool in every state for people not in self insured companies and not covered by Medicare? What a single pool means is that the price an insurer charged would be the same for everyone, irrespective of whether individuals the insurer is insuring entered the pool as part of a small business, a large business or as an individual. The insurers and providers – not the government – would be running the health care system, a factor that’s important to the vast majority of voters. The states’ role would include creating and monitoring the exchanges on which insurance would be purchased and re-balancing money flows if an insurer ended up with a disproportionate number of high-risk covered lives.

With this approach, insurers would have a high vested interest in making more people healthy. By showing buyers how they helped improve health status and lowered health care costs, they’d win a larger share of the pool. And states would have a vested interest in improving state-wide health status as it would ratchet down the cost of health care in the state.

The single pool system will likely require a minimum benefit plan across states. But this minimum plan need not be as all encompassing as some state insurance regulations have demanded. In fact, I’d expect that when insurers stop competing on managing and pricing risk and instead compete on value, we’d see lots of innovations in different approaches to insurance e.g., “whole health” plans that include all kinds of complementary medicine and “just the basics at basic prices” plans for individuals wanting to minimize costs. The former would cost those selecting it more than the latter.

Ideally, insurers would be allowed to compete across state borders. The single pool would also require most people to be insured, as insurers will need healthy lives in the large pool to make the pool a profitable one to insure.

I understand why health insurers would not like the single pool – they make a lot of money by having oligopoly-pricing power over small and medium-sized employers and individuals. But can anyone tell me what is wrong with this approach to disrupting the insurance business model? In a nation facing epidemic obesity and diabetes, in adults and our children no less, with costs totally out of balance with health status results relative to other developed nations, disruption is our only health care policy option.

More articles by Kay Plantes

Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. Business model innovation, strategic leadership and smart economic policies are her professional passions. She resides in Madison, Wisconsin and Oslo, Norway. For more information visit her website - Business Model Innovation and read her most recent book - Beyond Price.

The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.

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