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The Three Trends Fueling Health Insurers’ Frightening Growth and Profitability

The top three trends that have enabled insurers to rise to the top tier of American corporations and report record-breaking profits quarter after quarter.

By Wendell Potter

2020 was the year of the worst pandemic of our lifetime, and it turned out to be the most profitable year ever for America’s health insurers, even as many hospitals and physician practices were struggling to stay afloat. Unless current trends change and cause some unexpected reversal of fortune, 2021 will likely bring more of the same — if not bigger profits — for health insurers.

In this article, I’ll identify the top three trends that have enabled insurers to rise to the top tier of American corporations and report record-breaking profits quarter after quarter. If you’re wondering, those qualifiers are not meant to be compliments.

But first, here’s some context to set the stage.

If it ain’t broke…

Considering how well the status quo is working for health insurers, you can understand why they are spending more and more of their premium revenue on lobbying and PR efforts to kill or weaken health insurance reform proposals, especially the one championed by President Biden during his candidacy: establishing a public option to compete with private insurers.

Health insurers talk a good game about “choice and competition,” but their actions in both the marketplace, in which consolidation has created companies far bigger than just a decade ago, and the political arena, belie their talking points. During the first quarter of this year, the industry’s biggest trade group, America’s Health Insurance Plans, spent more money on lobbying in Washington than any prior 3-month period. Centene, one of the industry’s newest and now biggest players (thanks to a string of acquisitions), spent a whopping 80% more between January and March of this year than during the same period a year ago.

With diminishing competition, the big for-profit insurers have been able to use the premium and fee increases they demand from customers to bulk up, transform themselves to the point that the terms “insurer” and “payor” are antiquated and no longer descriptive, and erect nearly impenetrable barricades to keep would-be reformers and competitors at bay. The same can be said of the 35 nonprofit Blues as many dominate their individual markets, as well as the political landscape in their individual markets.

These companies’ aggressive push for vertical integration (e.g., massive M&A activity) has catapulted half of the big six (Anthem, Centene, Cigna, CVSHealth, Humana, and UnitedHealth Group) into the top 20 of the Fortune 500 in recent years — and two of them into the top 10. CVSHealth, Aetna’s parent company, now ranks #5, right behind Amazon, Walmart, Apple and Exxon Mobil. UnitedHealth Group is #7, just below Berkshire Hathaway. Cigna, which was #141 on the list when I left the company’s employment in 2008, is now #13.

Now onto the turbo-charged, profit-enhancing business practices driving pandemic profits

The trends that have made some of the biggest contributions to health insurers’ unprecedented growth and profitability were well underway in 2010 when Congress passed the Affordable Care Act, which conventional wisdom (even on Wall Street) held would put a big crimp in insurers’ profit margins. While the ACA did make several common industry practices illegal — notably their refusal to sell coverage to people with preexisting conditions (or charging them more than most could afford) and spending less than 80 percent of premium revenue on claims — it didn’t deter insurers from going on buying sprees and turbocharging other, still legal, profit-enhancing business practices.

Trend #1: Vertical Integration

When I left the industry a little more than a decade ago, most of the companies’ M&A activity was still horizontal, meaning insurers were buying or merging with competitors. When Humana recruited me in 1989, it was better known in the managed care space than UnitedHealth was at the time, even though Humana hadn’t yet shed its even better-known hospital division. But UnitedHealth was busy quietly buying relatively small local and regional health plans. It entered the big leagues in 1995 with its acquisition of Travelers’ and MetLife’s group health businesses. Numerous other acquisitions followed. In more recent years, with fewer competitors left to buy, UnitedHealth has shifted its M&A strategy (as have most of the other bigs), making it no longer horizontal M&A, but vertical integration, meaning the company is now deep into healthcare delivery. It’s fastest growing and most profitable division these days is Optum, which not only operates a huge PBM but also outpatient facilities, including kidney dialysis giant DaVita, and numerous physician practices. It surprised even me to learn that UnitedHealth is now the country’s biggest employer of doctors — more than 50,000 at last count with plans to add another 10,000 this year.

UnitedHealth’s competitors had no choice but to follow suit and go vertical. Cigna went big with its 2018 acquisition of Express Scripts. Aetna is now a big part of a company that operates not only a huge PBM but 10,000 retail drug stores, many of which now employ doctors and nurse practitioners in their walk-in “MinuteClinics.” Anthem and Humana — and to a lesser extent Centene — have also become more diversified companies by entering the provider space. This change in M&A strategy obviously has enormous implications for the country’s doctors and hospitals.

Trend #2: Changing sources of revenue

Not only have these big corporations experienced massive growth in revenue from their non-health insurance lines of business, but their health plan revenues have also seen a big shift in recent years. Not so long ago, the big insurers were getting most of their health plan revenue from private-sector customers, primarily the nation’s employers. But after the Medicare Modernization Act of 2003, which made the Medicare Advantage business more lucrative, insurers flocked to that program. Now, many of the big insurers get more of their health plan revenue from government programs — primarily Medicare and the state Medicaid programs they manage — than from private employers and individuals shopping for coverage on the ACA exchanges. In the first quarter of this year, 72% of UnitedHealth’s U.S. health plan revenue came from government payers. The shift has been almost as stark for the other big players. Centene, which has grown rapidly through numerous acquisitions, has very few private paying customers.

Trend #3: Barriers to care

Health insurers theoretically have two ways of managing healthcare costs: Influencing the unit cost of goods and services and influencing access to those goods and services. Despite their size, they have an unimpressive track record when it comes to reducing the unit cost of those goods and services, prescription drugs in particular. One could argue that they have little interest in doing that. As long as there is no competitor (as a robust public option might be), insurers can simply raise the premiums they charge customers to account for anticipated increases in “medical trend.” In other words, the more the prices of goods and services increase, the more insurers can demand in premiums from their customers. Drug rebates processed though insurer-owned PBMs offer an entirely different set of disincentives, and massive opportunities for payor margin growth, as well.

Where insurers excel is in restricting access to care, and in recent years they have ramped up those restrictions to assure levels of profitability suitable to Wall Street. Those barriers to care include more aggressive prior authorization requirements, ever-increasing out-of-pocket requirements of health plan enrollees, and the elimination of doctors, hospitals and other healthcare facilities from their provider networks. In many cases, the eliminated providers are being replaced by the companies’ own providers.

In future articles on Un-covered, I’ll dive deeper into each of these trends, touching on the consequences of these developments for both healthcare providers and their patients — as well as employers and the U.S. economy as a whole — and assess their sustainability.

Will the good times continue to roll for the bigs or will their power and reach into our lives somehow be curtailed? And what can providers, employers, and regular folks do?

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