Insurance Companies Leaving Health Care Will Lower Costs

Today’s Managing Health Care Costs Indicator is

That’s how many people will no longer be able to obtain health insurance from Principal Financial Group of Iowa, which announced yesterday  that it would retreat from the health insurance market. 

Principal has focused on small businesses, and does not have a large footprint in any given geographic market.  I believe that Principal has decided to stop writing health insurance because

1)     The new law requires “medical loss ratios,” or the portion of the health care premium to be spent on health care, to be at least 80%.  It’s hard to get a reliably low MLR with very small accounts where the costs of sales and administration tend to be high.  Further, with small populations spread across many states, Principal might have been viewed as multiple different health plans, and randomness alone might have meant some of those plans would had MLR of >100%, and Principal would have still owed premium back for the states in which it was profitable.
2)     The exchanges to be established in each state will be highly attractive to small businesses, and thus will compete with Principal’s current business.  Principal is not a low-administration organization, and will find it hard to compete in this space.
3)     New regulations will require systems changes at all insurers, and smaller insurers won’t be able to amortize the cost of these changes over as many members. Examples of changes include the requirement to report the value of health insurance on W4 forms, and the requirement to cover certain preventive services.

Many commentators are worried that the loss of some smaller insurance companies from the health insurance market could lead to rising health care costs.  Here’s why I believe that the withdrawal of Principal (and other similar health plans with small membership dispersed over many markets) will lower health care costs.

Health plans add value, and help control the costs of care, through

1)     Discounts from providers that decrease cost per unit
2)     Network contracting that includes the highest value providers, and excludes providers who charge too much or whose quality is poor.
3)     Pay for performance or other contracting that encourages and rewards wise resource use
4)     Product design that encourages members to use care wisely
5)     Utilization management programs that decrease utilization
6)     Health management programs that decrease utilization or improve health
7)     Competent claims administration that interdicts fraud and prevents overpayment

In general, regional health plans with significant market penetration in their geography can develop deeper relationships with providers and might be able to do a better job than the four large national health plans (Aetna, Anthem/Wellpoint, Cigna and United Health Care.

However, small health plans that are widely geographically scattered generally have high administrative costs, and they’re not able to increase value through higher discounts, better contracts, or higher value networks.  They don’t have the data capabilities of the big nationals, or the on-the-ground knowledge of the regional health plans.  They don’t have the integrated network that is at the heart of the value equation of Kaiser, or Geisinger, Mayo, and Cleveland Clinic. 

The withdrawal of this type of health plan from the market will lower costs in two ways.

1)     Providers are able to charge health plans with small footprints relatively higher unit prices. Therefore, the withdrawal of companies like Principal is likely to increase health plan leverage, and should result in lower unit costs.
2)     Small health plans that are widely distributed have high administrative costs

There will be many unintended consequences from the health care reform bill.   Not all of them will be bad!