Old-School Health Plans Fading Away

A longtime standard-bearer of medical underwriting calls it quits and puts itself on the block. Its fatal flaw? Being out of sync with post-PPACA market realities.

When revolutionary change comes to an industry, the fittest thrive and the frailest wither.

In the healthcare marketplace, frailty comes in many forms. Most weaknesses are clearly seen on balance sheets, but one of the most fatal flaws is far more fundamental than almost any set of line items bathed in red ink. When business models and corporate cultures fail to adapt to marketplace transformation, organizations tempt fate and risk a bad date with destiny.

The recent announcement that Assurant Inc. plans to "exit" the health insurance market by next year is a fateful turn for the New York-based company and its Assurant Health division, which has been in the health insurance business since 1892. Having racked up losses estimated at $85 million in the first quarter of this year, it appears that the longtime standard-bearer of medical underwriting could be headed to the dustbin of history.

Assurant Health has about 1 million covered lives, mainly in the small business and individual markets. Company officials declined to comment for this column. Who could find fault in their silence? No one wants to admit to falling behind the times.

Soon after adoption of the Patient Protection and Affordable Care Act in March 2010, Assurant Health announced the layoffs of 130 workers. Just a few weeks before that restructuring ax fell, then-CEO Robert Pollack told investors an unfortunate truth about the organization: "Our historical strength has been world-class risk management around underwriting."

In March 2010, underwriting should have been a dirty word. Certainly today, no health plan organization wants to be identified with the practice of freezing sick people out of healthcare coverage because they are sick.

The discredited practice of underwriting left its mark on Assurant Health. In 2009, the Supreme Court of South Carolina upheld a multimillion dollar jury verdict against Assurant Health, which was operating as Fortis Insurance Company when the lawsuit began. A jury had found that Fortis unlawfully rescinded a man's health coverage after he tested positive for human immunodeficiency virus. The South Carolina case also revealed that Fortis had systematically targeted HIV-positive beneficiaries for cancellation of health coverage.

Out of Sync
Uwe Reinhardt, professor of economics and public affairs at Princeton University, says Assurant Health's underwriting tradition is out of sync with post-PPACA market realities.

"It seems that Assurant's pre-Obamacare business model relied heavily on cherry picking and ex-post rescission, plus a low medical loss ratio," he told me this week, noting the "MLR" calculation that measures health plan administrative costs against premium dollars spent on healthcare services and quality improvement. "Obamacare was specifically designed to drive such firms out of business. One might say, 'Good riddance!'"

Time for Change
Successful health plans in the emerging healthcare marketplace are catering to consumers, according to Marianne Udow-Phillips, director of the Center for Healthcare Research & Transformation (CHRT) at the University of Michigan. "It's a time of change for health plans and they have to prepare," she told me this week. "Customer service has always been bad at health plans, and it has to get better. They need more technology. They need to make it easier for their members to figure out."

Based on research of Michigan's 2014 individual health coverage market, CHRT released a report this week that shows cost is the primary factor driving consumer decision-making. In the study, 92% of beneficiaries cited cost as a "very important" factor in purchasing health coverage, with only 41% citing a health plan's provider network as a "very important" factor.

Udow-Phillips, who worked for two decades at Detroit-based Blue Cross Blue Shield of Michigan, says high-deductible health plans have put consumer skin in the game, and payers have to play with a new set of rules.

"The individual market, where you see a lot of high-deductible plans, is still small; 60% of people get coverage from their employers. But even in the employer-sponsor insurance market, consumers are facing high-deductible coverage."

She says large, established commercial payers have an undeniable advantage over their smaller longtime competitors. "You have to make some bets and make some predictions. What most health plans are doing is hedging their bets. Larger organizations like Aetna are well-positioned because they have the resources to invest in new products… Health plans have to be consumer-oriented and mindful. It's moving to a retail market, and they need to understand that."

Data Analytics a Key to Success
Katherine Hempstead, team director and senior program officer at the Robert Wood Johnson Foundation, says critical mass and the ability to manage healthcare service utilization are key considerations for payers as US medicine shifts from volume to value.

"The successful carriers are going to be able to minimize costs by managing utilization, both through network composition and incentives to providers and through plan designs that create incentives for consumers. Data analytics and real understanding of utilization costs seem like they would be essential, and size also becomes important. It is hard to influence providers when you are a very small share of their revenue. The current conditions favor larger carriers who have leverage with delivery system participants and can invest in data analysis," Hempstead told me this week.

To thrive in the new healthcare marketplace, commercial payers must strike a delicate balance, she says. "Consumers are craving simpler plan designs, lower transactions costs, and more convenience and better customer service from the healthcare system in general… The carrier that delivers on those features stands to gain market share. However, these changes must be accomplished in a very smart way that does not unintentionally facilitate additional utilization, because cost is still king."