The Future of Health Plans

It’s been a bad week for health insurers – most of them lost substantial value in the stock market this week after the Obama budget was released, causing investor worry due to lower payments to Medicare HMOs.  Further, the economic funk and rising unemployment will lead to a decrease in the number of Americans insured through the private marketplace, and continuing “buy downs” from comprehensive coverage to policies with higher deductibles and copays.  These plans are also far less profitable to the insurers.


Perhaps the biggest threat to health insurers is the possibility that health care reform could allow those under 65 without disabilities to “buy into” Medicare.   Proponents argue that Medicare has low transactional costs, obtains high levels of provider discounts and offers excellent choice to its patients.  How does Medicare achieve these economies?

(1)Medicare spends less than commercial health plans on administration as a percentage of premium – in part because it need do no marketing to attract enrollees, and in part because the premiums are so much higher for the Medicare population than they are for those under 65 (so administration costs shrink as a percentage of total costs.)

(2)Medicare does not do “network contracting” as private health plans do.  All licensed physicians who have not been convicted of fraud are eligible to join – and to do so they must agree to follow a uniform set of Medicare rules and to accept Medicare reimbursement rates. 

(3)Hospitals have long collected data showing that they lose money on Medicare, and make this up by obtaining high rates from commercial insurance plans.  It’s a classic example of cost-shifting.  If the commercial plans didn’t exist, we would either have to take billions out of our inpatient facilities, or Medicare would have to pay substantially higher rates.  


Today’s NY Times has an article by Reed Abelsonon how health insurers are positioning themselves for health care reform. The article contrasts the approach of United Health Care, which boasts of diversifying its business, with Aetna, which promotes itself as a company that can actually influence the delivery of health care.


Without diversifying out of health insurance, how can health plans add value and continue to prosper in the coming years?


(1)Empower patients

Engaged patients who know about their illnesses and their medical care have better outcomes, and sometimes they even prevent medical errors.  Health plans are excellent at marketing, and know how to get the attention of their enrollees.

(2)Convert vast quantities of data into information to transform health care

Some commentators decry the inaccuracy and lack of timeliness of claims data.  But my experience is that claims information is very complete, since few providers fail to bill for their services. Unfortunately, electronic medical record data tends to be unstructured and is documented differently from system to system.

(3)Promote innovative payment methodologies for providers

The current predominately fee for service reimbursement encourages additional units of service, and does not encourage coordination of care.   Medicare is statutorily mandated to pay fee-for-service, and based on its size alone would have a hard time moving ambulatory care into episode based payment or capitation.  Health plans have to compete with each other for patients and for provider networks, and the existence of multiple competing insurers makes it more likely we will see innovation in payment methodology.  

(4)Develop selective networks

Medicare is too big to develop exclusive networks, and the political fallout from excluding a major hospital or a large group of physicians from Medicare would be huge.  Health insurers can develop selective networks for a broad range of patients, or can develop selective networks for narrow groups such as patients who require organ transplantation or inpatient behavioral health care.   Multiple competing insurers are key to this type of innovation.


Medicare made some substantial strides in promoting transparency over the last few years   But health plans have put dramatically more information on the web about provider quality.  Health plans should make their data available to state agencies or collaborative to do reporting, and should continue their efforts to educate their members about where to get the highest quality, cost-effective care.

(6)Promote evidence-based care

We have adequate evidence of the efficacy of too few medical decisions. But even where the evidence is in, our health care system remains unreliable.  We treat few diabetics to blood pressure, blood sugar, and cholesterol goal, and we send patients out of our offices with blood pressure which is often too high.  We miss vaccinations and cancer screenings. We give patients medications that are dangerous in combination, and medicines that are dangerous in the context of an individual patient’s coexisting medical illnesses.   Health plans should use claims and other data to identify opportunities to improve care for individuals and populations, and implement programs to alert providers and patients to opportunities to deliver better health care.



Health care reform will mean enormous changes – and much disruption in the health insurance market.  There will be plenty of opportunities for innovative health plans to add value and use their expertise to improve the quality and the cost-effectiveness of care.