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Who is the insurance company’s customer?

Thursday, October 26, 2017

Authored by Rick Klein, Senior Vice President in Horton’s Employee Benefit Solutions

In my previous post, The definition of insanity, when it comes to health insurance, I suggested a new way forward in managing employer-sponsored health plans.

This series of posts is about changing the mindset of mid-sized employers to focus on the innovative over the traditional approach to healthcare spending.  Ultimately, we want to enable a business to manage their health insurance like every other facet of their business with information, data, transparency, and flexibility.  But first I think it is important to understand the partnership that most employers have with their health insurer as that will build a good intellectual foundation for what we will ultimately discuss – the benefit of joining a health care coalition and self-insuring your own risk.

In general, over time, your healthcare costs should fit the following formula: 

Plan Healthcare costs = Plan Administrative Costs + Cost to Insure Against Large Claims + Cost to Reimburse Doctors & Hospitals for Small Claims

So, in an environment where inflation has hovered around 3%, why are health-related costs so much higher? To answer this question, you need to understand the actual cost drivers of healthcare of which there are two.

  1. Those derived from hospitals and providers; and
  2. Those derived from an insurance company’s business model

I will leave the analysis of why charges in a hospital or doctor’s office continue to climb for another time. For now, I want to focus on the insurance company business model. First, realize that an insurance company is a company just like any other – they exist to make a profit and give a return to their owners (in most cases outside shareholders). This is not bad as there is nothing inherently wrong with a business model designed to make a profit. 

So how does an insurance company make a profit? Fundamentally, publically traded insurance companies profit when the spread between what they charge in premium is more than what they pay out for claims and associated business and operational costs. That profit margin needs to be steady and, if possible, growing for their stock price to appreciate. If you measure performance by their stock price (or by revenue for those that are not publicly-traded),  they have done quite well over the last few years. Look at the following list of the large insurance companies using data from the low point of their stock price in 2012 to the close of business on October 20th, 2017. 

  • United Health Group – 299% increase
  • AETNA – 320% increase
  • Humana – 276% increase
  • CIGNA – 312% increase
  • Anthem – 255% increase

The largest insurer in Illinois, Blue Cross of Illinois, is not publicly-traded but they did rather well with their revenue increasing from $20.7B to $34.5B during the same time period. Please don’t take this the wrong way; I am all for companies making money and growing their stock price. But now you can begin to see the inherent conflict that most insurance companies have; the need to offer competitively priced products while limiting the outflow of money to pay claims. However, when these insurers limit or delay paying claims to hospitals and doctors, the provider community gets mad and in an environment where the demand for healthcare is increasing, where medications and procedures to treat illness are becoming ever more complex and costly, and where there is little incentive or mechanism to aggressively control the cost of medical services – the path of least resistance in looking to maintain profitability is simply to raise premiums. 

In all fairness, the problem with healthcare spending is not limited to the insurance companies. A significant problem is that the Affordable Care Act did not address the cost of medical procedures. Instead, it focused on making access to healthcare broader. That worked very well and is one of the reasons for the increased profitability of these companies. But go back to the definition of what is considered profit for an insurance company  – the spread between collected premiums and paid claims and ask yourself what innovations have these companies done to hold down claims (which would assist them in holding down premiums). Wellness programs? In my opinion, carrier-based wellness initiatives have had limited success, and their utilization is minimal among most groups Tough negotiators for in-network discounts? The once effective PPO network discount has become obsolete. What good is a percentage discount if you can’t control the cost of the service? Questioning claims submitted by doctors and hospitals for their efficacy?  To attract and contract with doctors and facilities, insurance companies tout the speed of their reimbursement many times sacrificing accuracy for speed.  Narrow networks? High Deductible plans?  Narrow networks just serve to reduce access for employees and cause frustration and high deductible plans merely shift financial liability from the insurance company to the member. None of these are directed at the root cause – the ever-increasing cost of a procedure. It makes you ask yourself the question – “Who is the insurance company’s customer? The health plan sponsor (which is you!) or the doctor and the hospital? 

So I ask you to keep this question in mind as I begin to build a case for a better way forward. Ask yourself if you and your company’s needs are in alignment with the insurance company that underwrites your plan? Is it the same alignment that you have with every other one of your vendors?  Do you consider the insurance company a partner in managing your risk; one that is prepared to share risk with you? If the answer is no to these questions then you need to really consider a new way forward.  

Stay tuned as next time we will begin to explain the building blocks of this new path forward. In the meantime feel free to reach me at or 708-845-3123 for more immediate information or to go deeper into any of what I have shared.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.