Health Insurers: Mind Your Own Business!

You may have received a refund check in the past few months from your health insurer. This is not your individual reward for staying healthy; it is your insurer's punishment for making too much money because you did.

Obamacare includes what the health care technocracy calls the "MLR rule" - minimum requirements for medical-loss ratios - or the percentage of premiums collected by health insurers that must be spent on medical care or refunded. The inverse of the MLR is the percentage spent on administration and marketing, and earned as profit. Obamacare sets minimum MLRs of 80 percent for individual and small group plans, and 85 percent for large groups.

Aside from its obvious populist appeal, this profit regulation mechanism signifies a belief, now enshrined in legislation, that health insurance markets do not work. Without such a rule, the architects of Obamacare believe, insurers can name their prices, however inflated, and we all just pay.

In the short term, that is true. Most health insurance plans price only once per year, are subject to long delays in cost trending information and multi-year underwriting cycles, and endure the meddling of a carnival midway's worth of employee benefits tinkerers, agents, brokers, consultants, and other conflicted middlemen. But in the long term, over multiple annual cycles, premiums do rise and fall, and the health insurance industry's fortunes with them.

The MLR rule may well put an end to these admittedly slow, imperfect self-correcting market forces. Under Obamacare, the industry is transfigured from an inefficient, barely competitive mess that tries, against the laws of health care gravity, to control medical costs, to a non-competitive, profit-regulated utility rewarded with 15 to 20 extra cents for every dollar it allows its medical costs to rise.

What would any rational firm in a slow-motion marketplace do when it faces a new lockdown rate on its administrative and marketing costs and profits? First, find ways to let the cost basis for the lockdown rise, i.e., let medical costs inch up. Then acquire competitors to minimize friction for the strategy. Finally, buy up suppliers - i.e., those generating the bulk of medical costs, namely hospitals and doctors - so as to capture what would have been capped margins upstream of the insurer's MLR calculation.

Retail Therapy for Anxious Insurers

Such acquisitions constitute the deal flow of health insurers since the weight of Obamacare started to hit their income statements this summer. As an encore, they are also dumping billions of shareholders' capital into all manner of adjacent businesses, believing they can cross-sell products and services to their customers free of the MLR regulation, e.g., Wellpoint's nearly $900 million purchase in June of 1-800 Contacts.

Health insurers are reacting to Obamacare the same way they did to the last assault on their profit margins, managed care in the 1990s, with lockstep acquisitions - of each other, of providers, and of businesses with often tenuous relevance to their core competencies. Last month, Wellpoint agreed to pay $4.5 billion for Amerigroup. Last week, Aetna purchased Coventry for $5.7 billion. This is probably just the ante; the stocks of health insurers have taken a pounding since the Supreme Court upheld Obamacare, making them easier targets, and when more than one major insurer moves, many follow.

In addition to such horizontal consolidation, which will further reduce competition and the pressure to lower medical costs, insurers are also buying "vertically" - purchasing hospitals and physician practices around the country. There is much happy talk surrounding these deals about "care integration" and "accountable care" - the same sort of hooey that accompanied these such deals in the 1990s - and they will inevitably blow up in execution because of the same strategic and cultural conflicts. The most spectacularly messy version, so far: Highmark BlueCross' purchase of the second biggest hospital system in western Pennsylvania, a deal in all manner of trouble before it even closed.

The real goal of these deals: the health insurer wants to shift profits out from under the MLR rule, and pick them back up on the provider business - essentially re-locating margins from the regulated to the unregulated part of their portfolio. Good luck with that new hospital business under the current regulatory regime and imminent Medicare financing meltdown.

If health insurers wanted to protect their shareholders long term under the new Obamacare order, they would invest not in these desperate fantasies of market control, but in their own operations. "Managed care" may have come and gone but the myriad problems in the medical delivery system it tried to fix have not.

Where to start? Today's scandal au courant in dangerous medical excess is coronary stents - tiny wire devices implanted in coronary arteries - a cash cow business for hospitals that pose great risk to patients, many of whom, it turns out, do not need them. Where else? Though the media has tired of talking about it, the related epidemics of obesity and diabetes rage on. And all the perennial problems associated with sprawling cancer treatments, under-medicated diseases, over-medicated nonsense, and needless interventions at both the beginning and end of life are screaming for the rationalization that only a health insurer can bring to bear on a money-driven delivery system.

And yet the insurers put their considerable capital and talent into what? Acquiring each other. And contacts lens companies. Wow.

The insurers would be better served minding their real business: managing the medical costs and health status of those they insure. There are no fancy tricks or world-beater press releases for this - just lots of hard work adjudicating claims, rooting out fraud, aligning payment with evidence, managing provider and patient adherence to the evidence, tracking outcomes, and steering people toward the better hospitals and doctors. These are the mostly untried but still true great ideas from the past two decades that everyone likes to talk about, but almost no one gets around to executing.

Perhaps because such execution is hard work. Buying and selling businesses has always been more fun than creating, growing, and running them - especially when confronted by market-distorting garbage like the MLR rule, which is designed specifically to punish those businesses for their success.