Health insurance companies, will they go the way of other middle-men in and outside of the healthcare world?

We are all very familiar with how many historically entrenched middle-men have been squeezed out or are being threatened by advances in user-friendly technology or innovative third parties in the non-healthcare world. Examples include: travel agents, retail stores, wholesalers, etc. In fact there is word for this, "disintermediation" which I never knew existed (I know, hard to believe).

Disintermediation is the removal of intermediaries in economics from a supply chain, or cutting out the middlemen in connection with a transaction or a series of transactions.

Down the road, you and I will probably fall in this category as driverless cars take over.

We will look at examples of this squeezing out of the middle-man in the healthcare world, and contemplate if insurance companies may also succumb to a similar fate.

--- Tom

Examples of middle-men being squeezed out or being threatened in the healthcare sector include the following:

* Pharmacy Benefit Managers (PBMs) - The combination of their lack of transparency and their inability to demonstrate real value in the marketplace has targeted PBMs for extinction.

* Health insurance brokers who were initially concerned about their role in the health insurance exchanges during the debate relating to the passage of the Affordable Care Act (ACA), but ultimately were negatively impacted from an income perspective as a result of the medical loss ratio provision placed on health insurance companies' administrative costs.

Heck, doctors and hospitals, for some services, could become victims of the other middlemen as millennials and subsequent generations become more dependent on technology and the internet as their go-to source for healthcare information.

Health insurance companies are facing challenges from all directions, including:

1. Hospital systems getting into the payer side by starting their own entities (solely or in collaboration with a third party) or directly contracting with employers;
2. Self-insured employers using third-party administrators to pay claims as well as the utilization of innovative pricing mechanisms such as reference pricing in various forms which are often not utilized by traditional health insurance companies;
3. More employers are becoming self-insured. Health insurance companies make less money off of self-insured employers since the employer is taking the financial risk.
4. Technology companies and third-party entities, with varying degrees of success, providing enhanced value-added services to employers over what is currently being provided by health insurance companies in such areas as price and quality transparency tools;
5. Third-party entities brokering relationships between providers and employers especially in niche areas such as center of excellence services (i.e. bariatric, heart, etc.);
6. Unknown threats include the recent media exposure to the Amazon, JPMorgan Chase, and Berkshire Hathaway collaboration. In one of my recent blogs, we discussed an article by Dylan Scott of Vox which stated the following, “What’s potentially interesting here is who these companies are. This could represent a potent combination of technological knowhow, a massive online sales presence, and investment expertise aimed at health care,” said Larry Levitt, senior vice president at Kaiser Family Foundation. “Are they going after insurers? Hospitals? Drug companies? All of the above? I guess we’ll find out.”
7. Finally, there have been ongoing discussions about eliminating the employer from the healthcare equation and either going to more of a nationalized or a personal responsibility approach (portable HSAs with subsidies when applicable) to pay for healthcare services. Either of these alternatives, although unlikely to occur, would have a devastating impact on the health insurance industry.

What are Health Insurance companies doing today to avoid falling into a fate similar to other middle-men?

1. Health insurance companies are entering into all areas of the provider side: (also see my "Return of the for-profits blog" for additional background of this trend)

• UnitedHealth Group: Optum, United's subsidiary is rapidly growing in urgent care, surgery, and analytics. Two examples include the acquisition of Surgical Care Affiliates and the $4.9 billion acquisition of DaVita Medical Group, which has nearly 300 medical clinics. United is also expanding into international markets such as Brazil.
• Walmart/Humana (?) Will these merger talks cause further disruption in the healthcare world?
• Anthem is also getting into the provider side: "Anthem’s deal to buy a large Florida Medicare Advantage plan and its network of primary care practices could be the beginning of a buying binge designed to compete with rivals like UnitedHealth Group’s Optum unit."

Health insurers integrating into the provider side is not new, Kaiser Health being the most obvious example. This integration has the potential to lower healthcare costs in competitive marketplaces and could make value-based healthcare more of a reality.

The jury is still out regarding its long-term success possibilities, but I am a great believer in competition as long as the buyers of healthcare services (employers/consumers) know the cost & quality differences between the providers of care.

2. Health insurance companies are acquiring third-party entities, such as Pharmacy Benefit Managers (PBMs), to add to their value package:

Pharmacy Benefit Managers (PBMs)

* UnitedHealthcare/Catamaran, CVSHealth/Aetna , and Cigna/Express Scripts are examples of such acquisitions of pharmacy benefit managers (PBMs).

Will the acquisition of PBMs by health insurance carriers provide better value to the market in the form of lower healthcare costs and better quality? In theory, placing the drug and the medical side under one roof should encourage innovation and better quality care. Ultimately, this value-equation will only occur in a competitive marketplace.

All sectors of the economy go through the "make vs. buy" business strategy as it relates to their supply chain. There are examples of successes and failures related to these business decisions. The auto industry decision to outsource much of its supply chain was one of the keys to its financial turnaround in the 1980s.

Ultimately, time will tell, but I don't think that the only successful business model will require integration of the PBM into the health insurance entity. There are transparent PBMs in existence that do provide value in the marketplace. Given the advances in technology, these PBMs in collaboration with the health insurance company should be able to successfully integrate drug data and medical information to provide a holistic view of the patient.

The litmus test will be: which business model translates to lower healthcare premiums (or in the case of the self-insured employer, lower healthcare costs) and better quality for the consumer?

3. Health insurance companies are aggressively entering the Medicare & Medicaid markets

As noted in a recent article in BDO, Medicare Advantage plans are now a growth engine for health insurance companies

The BDO article stated the following, "What began as an alternative to fee-for-service Medicare plans has now seen its enrollment double in the last nine years. We expect enrollment in these plans to continue growing, partly because of recent steps the current administration has taken to incentivize patient enrollment in these privatized Medicare programs."

"Due in large part to an aging baby boomer population, Medicare and Medicaid account for nearly 60 percent of the big five's revenues and 20 percent of their plan membership."

As discussed in my prior blogs, both Medicare Advantage and Medicaid Managed Care markets will continue to grow.

The federal government recognizes that with the onslaught of baby boomers into Medicare and the increasing number of seniors living beyond 85, there needs to be a fiscally prudent option to address this budgetary crisis and their answer is Medicare Advantage. The transferring of financial risk to the Medical Advantage plans will give the government the ability to better manage all of out national priorities (opportunity costs).

Medicaid Managed Care for some health insurance companies will also present some great business opportunities. As with the federal government, the states are facing budgetary challenges that will only get worse. States will continue to look for ways to pass on the financial risk of Medicaid (poor, long-term care, disabled) to third parties.

Concluding comments:

Will health insurance companies go the way of other middle-men? Probably not, but their fate is not certain and the answer is in their own hands.

Strategies for success require them meeting the needs of their customer (not rocket science, but not necessarily easy) and partnerships between employers, health insurance carriers and providers could help ensure success.

As stated in a prior blog, a major source of the disruption that is occurring in healthcare today and that will continue to occur in the future is caused by the transition of passive purchasers of healthcare services to active purchasers. The government (Medicare/Medicaid), employers (especially self-insured employers) and consumers especially as they are responsible for a bigger portion of healthcare costs, will demand more financial accountability from health insurance companies.

Ultimately, unless health insurance companies are able to demonstrate perceived and actual value in the marketplace to all of the above payers, their very existence is in jeopardy.

Health plans must develop a risk assessment program that gives them a rich, detailed view of members and their care needs. They must take the lead initiating risk/value-based relationships with providers that can take the form of capitation, bundled payments and various hybrids of each.

Unlike the 1990s (see prior blog), the health insurance companies need to play a collaborative role with the providers of care with regard to these risk arrangements. It needs to be a win-win arrangement, but with the ultimate winner being the consumer and the employer.

Health insurance companies are the keeper of the claims and pricing data with providers and they should not take a back seat to third-party entities. They need to take a lead role in providing user-friendly cost and quality transparency tools for their employers and members to promote prudent purchasing of healthcare services.

Health insurance companies need to expand their collaborative role with self-insured employers in addressing their specific healthcare cost challenges. In order to be truly collaborative, health insurance companies may need to develop partnerships in different forms with third-party entities (data analytics companies, etc.) to meet the needs of these self-insured employers.

Health insurance companies need to play a much more aggressive role as consumer/member advocates. An example would be the utilization of user-friendly technology and value-based benefit designs that further empowers their members to become prudent purchasers of healthcare services and educates them to be a better care-taker of their health.

There is no "one size fits all" view that applies to winners from a health insurance company perspective. Large national health insurance companies have the resources to penetrate many markets and add to their array of services but, as in the case of many large organizations in different business sectors, they are also vulnerable to regional and niche competitors that are able to implement successful strategies.

These smaller and more nimble organizations may not have the resources to compete with the national players, but they have the ability to really understand their specific markets and to develop the necessary relationships with providers and employers to be successful.

I welcome comments and additional perspectives on this blog from readers who work in or outside of the health insurance sector.

Thomas Campanella is the director of the Health Care MBA and an associate professor of health economics at Baldwin Wallace University near Cleveland, Ohio.

If you are interested in receiving a monthly summary of all of my healthcare blogs, you can respond to me on LinkedIn or e-mail Tom Campanella ([email protected]) with your contact information.

Source of pictures: pixabay.com & pexels.com