Obamacare is making health insurers bigger
THE future of Barack Obama's health law is uncertain. Its main provisions will not come into effect until 2014; the Supreme Court may strike it down before then. But America's insurers are already transforming. They were big before; now they are growing bigger. On October 24th Cigna, an insurer based in Connecticut, said it would pay $3.8 billion for HealthSpring, which offers services and insurance to the elderly. It is the latest deal to extend insurers' tentacles into new areas of health care. The question is whether they might actually improve it.
Good, cheap health care has long eluded America. Doctors are paid for each service, so they deliver as many as possible, necessary or not. Insurers protect margins by micromanaging claims and hiking premiums. These perverse incentives are addressed, faintly, by Obamacare. For example, there are pilots to reward hospitals for the quality rather than the quantity of their care. Mostly, however, the reform deals with the symptoms of muddled incentives: high premiums and poor access.
For insurers, reform holds opportunity and peril. From 2014 the law will require everyone to buy health insurance and offer subsidies to those who cannot afford it. As more people buy insurance, firms' revenues will more than double to $1.2 trillion by 2019, predicts the Boston Consulting Group. However, profits will be squeezed, thanks to a new tax, a minimum standard for benefits and new scrutiny of increases in premiums.
Faced with all this, insurers are keen to diversify. Many are hedging against a volatile private market by turning to the public one. More states are asking insurers to run Medicaid, the programme for the poor. HealthSpring will help Cigna tap the market for Medicare Advantage, private plans that use public money to cover the old. Humana, already a leader in public health programmes, has bought two Medicare firms this year (so far) and WellPoint has bought one. For these insurers, Medicare Advantage gives access to baby-boomers. It is also a testing ground for Mr Obama's new health 'exchanges', where consumers will be able to buy health insurance from 2014. Both are highly regulated markets that court consumers directly.
Insurers are spreading into new businesses. Last year Aetna bought a health information technology (IT) company. Humana recently bought a chain of clinics. Its new Medicare plans both provide care and pay for it. The thinking is that this will give Humana the means to keep more of its customers healthy. Others are doing the same.
UnitedHealth Group, the biggest health insurer, has been extending its reach for some time. Two non-insurance subsidiaries already account for 20% of its $94 billion annual revenue: OptumInsight, an IT business, and OptumHealth, which owns doctors' groups and provides services to help hospitals improve care. These ventures do not just create new revenue streams, argues Sheryl Skolnick of CRT Capital, a broker-dealer. They strengthen United's main business.
This is most obvious when OptumHealth buys a doctors' group. In August it announced that it would acquire Monarch HealthCare, in California. Bart Asner, Monarch's chief executive, predicts that Optum will help his doctors be more efficient, monitor patients' conditions and keep them healthier. United will enjoy revenue from owning Monarch. But as one of six insurers that contracts with Monarch, it will also benefit from patients' lower costs.
This virtuous circle extends to hospitals that United does not own. Historically insurers have fought with hospitals over payments. But now insurers are testing pay-for-performance contracts. Hospitals can use Optum's services to improve their operations, creating new revenue for Optum and new savings for United's insurance business. This strategy might begin to align the insurer's interests with those of its former adversaries.
