Needed: A Prescription For Ailing InsurersTim Smart
Health insurers are hardly the picture of health these days. Profits for the $210 billion industry are shriveling as medical reimbursement costs swell. Scores of corporate clients are ditching their insurance providers and paying for most health coverage out of their own pockets. And insurers' answer to the problems--setting up special networks of physicians designed to curb costs, called managed care--is years away from paying off.
It's hard to see when profits will rebound. Claims payouts and insurer overhead exceeded premium income last year (chart), and this year's experience should be even grimmer. At Prudential Insurance Co., for instance, costs outstripped income by 1.1% in 1991. The only thing that saves health coverage is income from investments, which puts the industry slightly in the black. But with interest rates falling, investment income is shrinking, too.
No respite is in sight from cost pressures. Medical inflation continues to roar ahead, even as other prices ease. Health care outlays soared 11% in 1991 and are expected to stay in double digits for the foreseeable future since the population is aging. At American Express Co., executives grouse about how premiums charged by Aetna Life & Casualty Co., their insurer, are climbing 18% to 20% each year. But much of the money passes straight through insurers to the health professionals. Higher health-insurance premiums can "barely keep pace" with the increase in medical bills, says Salomon Brothers Inc. analyst Margaret M. Alexandre.
NO PANACEA. The desertion of corporate clients to self-insurance leaves insurers with crumbs. They get to administer the programs for companies, but fees are paltry compared to the potential of actually underwriting a client. Now, 45% of Corporate America is self-insured. The only brake on this trend is that self-insurance is seldom popular with employees, who often end up paying more of their bills out of pocket than under insurers' systems.
Insurers are placing a lot of hope in the managed-care networks, in which groups of doctors and hospitals are signed up by an insurer and agree to hold down costs. By contrast, under the conventional indemnity system, patients go to the doctor of their choice and the insurer picks up the tab for an almost unrestricted range and frequency of services. Managed-care networks now provide more than one-third of all group insurance--up from 5% a decade ago--and most experts feel it soon will be the dominant form of health coverage. Managed-care plans find great favor with employers. Two years ago, more than two-thirds of Digital Equipment Corp.'s 71,000 U.S. employees were on an indemnity plan. Now, two-thirds of the Maynard (Mass.) computer maker's workers use health maintenance organizations (HMOs), a type of managed-care plan. New indemnity coverage "has virtually disappeared," says Leonard E. Odell, vice-president of ITT Hartford Insurance Group's group-health unit.
At first blush, the promised savings make managed care look like a panacea. The Pru and CIGNA say they can hold annual premium boosts for managed care to half those of indemnity plans--and still are able to reap twice indemnity's profit margins.
But that's only part of the story. Setting up these health-provider networks is devilishly expensive. Before signing up, corporate clients usually want to see a massive nationwide web of medical professionals. Prudential in 1991 paid a large sum for the Johns Hopkins Health Plan in Baltimore, which covers 100,000 people. In 1991, after seven years at it, the Pru's $2.6 billion national managed-care operation finally eked out a tiny profit. Losses can be astronomical. Aetna, which claims that its system will break even in 1992, lost almost $100 million from HMOs in the past three years.
SCAPEGOATING? Small wonder that many insurers are heading for the exit from the health-care sector. Earlier this year, Lincoln National Corp. unloaded most of its health business to other carriers. Others retreating from medical coverage are Allstate, American General, Equitable, and Transamerica, which have sold off most or all of their health business over the past two years. That leaves the field to giants like Aetna, CIGNA, John Hancock, Prudential, and Metropolitan Life.
The remaining insurers are trying to capture elusive profits by squeezing expenses--which can mean cracking down on alleged overbilling by health providers. On July 31, eight insurers, including the Pru, filed suit for fraud against National Medical Enterprises Inc., accusing it of billing them for psychiatric treatment or drugs that either weren't furnished or were unneeded. The Santa Monica (Calif.) company denies the charges and argues that the insurers are making it a scapegoat for their own financial woes. Insurers are attacking overhead as well, by closing claims offices and offering electronic payment to providers, which reduces costly paperwork.
Overshadowing all these efforts, however, is the government question. Health costs and availability are a major issue in the Presidential race. President George Bush supports incentives to spur more managed care. Arkansas Governor Bill Clinton, while backing managed care, wants the states and Washington to set fees for doctors and hospitals.
That idea scares insurers witless because government intervention could put a lid on future earnings, such as they may be. But unless the carriers can provide adequate health coverage at rates that companies and individuals can afford, insurers may remember today's meager profits with longing.