...And How Are We Feeling Today?

Everything was looking so good. After more than a decade of effort and hundreds of millions of dollars in losses, big insurers last year were finally seeing some reasonable returns from the managed-care networks they had labored to create. CIGNA Corp.'s health plans earned $52 million last year, 17% of the company's total net income. And Aetna Life & Casualty Co. saw its health-maintenance organizations turn a $4 million profit in 1992, after suffering a $3 million loss in 1991.

Even better, the industry's bet on managed care was turning out to be politically correct in a big way. Bill Clinton swept into Washington promising to control health-care costs by reforms centered around the very sorts of integrated networks of doctors and hospitals that the big insurers were already in the process of building. The future looked rosy.

Not any more. Several key aspects of the Administration's current health-care plan could severely undermine the fortunes of the big insurers, especially those of the Big Five--Aetna, CIGNA, Prudential, Travelers, and Metropolitan Life. Provisions to cap the growth rate of premiums could badly damage their revenues and profits. And the Big Five may fare surprisingly poorly against regional insurers in the crucial competition to serve the new health alliances, which will be composed of businesses grouped together to give them health insurance purchasing clout.

But it's price regulation of managed-care premiums that is the most immediate threat. For consumers, that could spell more predictable insurance prices. But price regulation, in the form of caps, could slice as much as 30% from what insurers' health premiums would have been in future years without reform, says Lawrence G. Mayewski, a senior vice-president with insurance rating agency A.M. Best Co. Small underwriters that can't afford to build managed-care networks probably will suffer most because of the focus on networks, but "it would surely be felt by the large insurers," says Mayewski. "Clearly, it's not going to be an attractive situation."

TIGHT CAPS. Price caps, for one thing, would limit profits, which could bring about downgrades in credit ratings. That, in turn, could hurt large insurers' efforts to raise capital, which could inhibit their ability to build up their managed-care networks. These networks, concedes Thomas P. Pyle, chief executive officer of MetLife HealthCare, "are not very far along." Reduced resources, he says, "would be devastating to their


Lesser profits, insurers claim, would also limit them in developing programs that could ultimately reduce costs and improve care. Caps "will unwittingly destroy the integrity of a reform system," says a Metropolitan Life Insurance Co. spokesperson. "It will probably discourage the kind of investment that needs to be made to give the quality of care we would like to offer." Kevin Anderson, a White House spokesman on health-care reform, says consumers will go where the best health care is provided: "There's nothing that poses a danger to the quality of care. I think a lot of the fears of Draconian cuts in quality of care are unfounded."

Insurers also dislike the prospect of being dictated to by a national health board, a key reform proposal. Such a board would determine the cost of a standard benefit package and the per-person premium needed to cover the cost. Insurers fear that the board will tell them what care to provide and how often, making their products more of a commodity and reducing their ability to market proprietary health care. "It'll be hard to gain market share because you won't have flexibility," says MetLife's Pyle, referring to the new regulations. James W. McLane, group executive of Aetna's health insurance operations, has a similar view: "What concerns me about health-care reform is that it's going to screw up what we could accomplish on our own."

Even if insurance lobbyists manage to beat back price controls, other facets of health-care reform aren't shaping up as the bounty big insurers expected. A key part of the Administration's plan is the formation of large regional health alliances, which would be able to use their purchasing clout to force down premiums. The number of managed-care providers chosen is expected to be limited. The alliances would likely contract with a handful of companies in each state.

SMALLER AND NIMBLER. The Big Five had figured to be key players in serving these alliances. They certainly have large, far-flung managed-care systems. But unfortunately for them, smaller players such as Humana Inc. and Kaiser Permanente are much more entrenched in many regional markets. "A lot of local players have very strong footholds, high-quality networks, and they're currently underwriting a lot of accounts," observes Henry S. Moyer Jr., a partner at Hirschfeld, Stern, Moyer & Ross Inc., an employee benefits consulting firm.

"To respond quickly to change is much more difficult for large insurers," explains John Gannon, partner in charge of KPMG Peat Marwick's health-care consulting practice. "The small, nimble insurers can move quicker and tie up a market or certain product niches."

The best-positioned large insurer, CIGNA, is among the top three insurers in only 15 of the 40 largest managed-care markets, according to figures from Interstudy, a research firm based in St. Paul, Minn. Travelers fares the worst, counting among the top three in only one of the top 40 markets. "If you look at the Big Five, an awful lot of their business is spread out," comments Larry K. Lance, executive vice-president of Hartford Life Insurance Co., which recently sold its medical and dental business to Massachusetts Mutual Life In-

surance Co. because of impending reform. "In some markets, they're going to have to close up shop."

The big insurers vow to fight the plan--and fight hard. With the stakes so high, they can't afford to lose.

         INTENSIFIED COMPETITION New purchasing cooperatives would select a handful 
      of insurers to provide coverage in each market, but the Big Five health 
      insurers might not make the cut. They have far-flung managed-care networks, but 
      they could lose out in many markets to entrenched regional insurers, who have 
      signed up many of the best doctors and hospitals.
         PREMIUM CAPS Restrictions on premiums may limit how quickly insurers can 
      raise rates. That could hurt revenues and lead to credit downgrades and 
      difficulties raising money in the capital markets at favorable rates.
         LESS FLEXIBILITY Proposed national health board will dictate benefits 
      packages insurers can offer. That could reduce ability of big insurers to 
      increase market share with proprietary products.
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