Health Insurance Carriers
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Industry Overview
The US managed health insurance industry includes about 1,000 companies with combined annual revenue of about $500 billion. Major companies include Aetna, UnitedHealth Group, and Humana, as well as the Blue Cross and Blue Shield Association and Kaiser Permanente. The industry is highly concentrated: the 50 largest companies generate about 75 percent of revenue.
Globally, health care services are either provided by the government or paid for by individuals. Global demand for private medical insurance is rising, however, especially in developing countries with a growing middle class such as India and China.
Competitive Landscape
Demand for health insurance products is driven by the rising costs of medical care. The profitability of individual companies depends on efficient operations and the ability to negotiate favorable contracts with health care providers. Large companies and organizations have advantages in negotiating contracts with health care providers. Small companies can compete successfully by providing special coverage plans as part of government programs such as Medicaid, or for specialized populations. The industry is highly automated and capital-intensive: annual revenue per employee is close to $1 million.
The enactment of the Patient Protection and Affordable Care Act (PPACA) of 2010 is just beginning to effect the way managed care companies operate. The PPACA calls for health care coverage to be available for all Americans beginning in 2014; the law also eliminates some common exclusions, such as pre-existing conditions. Managed care companies will also compete for customers in state-run health exchanges, where small companies and individuals can buy health care coverage. Reductions in Medicare and Medicaid reimbursements also are likely as regulations in the new law tighten coverage and payment rates.
Products, Operations & Technology
The industry provides various types of health insurance plans that have built-in cost containment measures, unlike traditional indemnity plans that pay whatever costs are incurred. Among the major products are HMOs; preferred provider organizations (PPOs); point-of-service (POS) plans; and indemnity benefit plans. Companies usually offer a number of such plans and each may operate dozens of them.
HMO plans, sometimes called "closed system" plans, have the most active cost-containment features. Consumers choose a primary care doctor from the HMO's network of providers, who acts as a gatekeeper for any other medical services the consumer may need. PPO plans, also called "open access" plans, allow consumers to use any services within a network of providers, without a gatekeeper. Services outside the provider network are available, but cost more. POS plans are hybrids of HMOs and PPOs. They typically feature a primary care doctor who makes referrals for services within the provider network, but also allow consumers to avoid the gatekeeper and directly use services within the network, though at higher cost. POS plans also allow consumers to go outside the network at a still higher cost. The higher costs in PPO and POS plans take the form of higher deductibles, higher co-payments, or lower reimbursement rates.
Because of pressure to reduce rising health care costs, managed care organizations (MCOs) attempt to control costs in four ways: They provide financial incentives to providers and users to minimize the amount of care used, contract for services at discounted rates, review expenses to determine the legitimacy of costs, and establish low-cost treatment protocols providers are expected to follow.
Managed health care companies are administrative intermediaries between health care providers and users. They sign annual contracts for services with doctors, hospitals, testing labs, and other providers, usually at a fixed cost, and resell them to plan members for a fixed monthly premium. The risk that actual expenses will be higher than the contracted reimbursement rate is borne mainly by providers, although most plans provide a stop-loss provision that shares excess expenses with providers after a certain expense limit is reached. The risk that premiums are insufficient to cover administrative costs is typically borne by the company.
In addition to using financial incentives to limit unnecessary medical care, managed health care companies use "utilization management" to review and standardize care. Committees of doctors and administrators review the actual services used in the network to determine if they're being used appropriately, and to recommend standards of care that doctors and hospitals are expected to follow. Committees also determine drug formularies that specify which drugs should be used to treat specific conditions. The statistical information collected for utilization management is also used for risk management and underwriting, the process of determining what payments to offer providers and what premiums to charge consumers.
Computerized information and communication systems are vital to managed health care companies to process claims and manage records, and for statistical collection and analysis.With the mandate for electronic health records (EHR) established in the 2009 American Recovery and Reinvestment Act, managed care companies will also have to ensure their IT systems are compatible with the technology used by doctors and hospitals.
