Insurance Companies as We Know Them Are About to Die

Americans hate health insurance companies. They are easy targets for everyone to beat up on. When premiums go up, we blame insurance companies; we do not blame the underlying hospitals or physicians who charge high prices that drive up insurance costs. When people with cancer, heart attacks, or other diseases are denied insurance, we blame insurance companies; we do not blame the underlying voluntary insurance market that necessitates underwriting. When our wish for a new high-priced drug is denied, we blame insurance companies; we do not blame drug companies that set the price at over $100,000. Politicians can always elicit an applause by attacking the health insurance companies, reinforcing this bad-guy image of insurance companies.

This is not to say that insurance companies are angels, but they are also not the devil incarnate. A lot of what people consider to be their bad behavior is the inevitable result of the way the health care system is structured and how it incentivizes and forces certain behaviors.

The good news is you won't have insurance companies to kick around much longer. The system is changing. As a result, insurance companies as they are now will be going away. Indeed, they are already evolving. For the next few years insurance companies will both continue to provide services to employers and, increasingly, compete against each other in the health insurance exchanges. In that role they will put together networks of physicians and hospitals and other services and set a premium. But because of health care reform, new actors will force insurance companies to evolve or become extinct. The accountable care organizations (ACOs) (which I discuss in Chapter 8 of my new book) and hospital systems will begin competing directly in the exchanges and for exclusive contracts with employers. These new organizations are delivery systems with networks of physicians and hospitals that provide comprehensive care. This health delivery structure is in its infancy. Today there are hundreds of these organizations being created and gaining experience within government-sponsored programs or getting contracts from private insurers. They are developing and testing ways to coordinate, standardize, and provide care more efficiently and at consistently higher quality standards. Over the next decade many of these ACOs and hospital systems will succeed at integrating all the components of care and provide efficient, coordinated care. They will have the physician and hospital networks. They will have standardized, guideline-driven care plans for most major conditions and procedures to increase efficiency. They will have figured out how to harness their electronic medical records to better identify patients who will become sick and how to intervene early as well as how to care for the well-identified chronically ill so as to reduce costs.

The key skill these ACOs and hospital systems lack-the skill insurance companies specialize in-is the actuarial capacity to predict and manage financial risk. But over the next decade this is something they will develop-or purchase. After all, actuarial science is not rocket science, even if it involves a lot of mathematical equations. And with that skill, ACOs and hospital systems will become integrated delivery systems like Kaiser or Group Health of Puget Sound. Then they will cut out the insurance company middle man-and keep the insurance company profits for themselves. Therefore, increasingly these ACOs and hospital systems will transform themselves into integrated delivery systems, entering insurance exchanges and negotiating with employers, in direct competition with insurance companies.

This trend is already beginning. A recent article noted,

More health systems are seeking to contract directly with employers with deals to bundle the price for certain services or serve as exclusive contractor for all healthcare services for a company's employees, as in a recent agreement between Intel and Presbyterian Healthcare Services in New Mexico. The direct deals have emerged as hospitals and doctors face mounting pressure to keep healthcare spending in check.

As they gain more experience in managing groups of patients, such contracts between health systems and employers-cutting out insurance companies-will become more common. At that time the health systems will make the jump to offering coverage in the exchanges. In turn, the health insurance companies will have three possible responses. First, they can refuse to change, in which case they will eventually go out of business. Second, they can shift their business to focus on offering services they have expertise in, particularly analytics, actuarial modeling, risk management, and other management services. An example that foreshadows this evolutionary path is United Healthcare's Optum subsidiary, which sells management services to ACOs, hospitals, physicians, and health plans. As these customers need more help with analytics, risk management, and disease management, Optum will grow.

The third evolutionary path is that health insurance companies may transform themselves into integrated delivery systems. ACOs begin with the delivery system and will need to add the actuarial capacities to become integrated delivery systems. Insurance companies, however, start at the other end: they begin with the actuarial skills and need to add the actual providers of care. The easiest way for them to accomplish this is to buy or enter into exclusive agreements with efficient hospital systems, ACOs, or physician groups. This is just beginning to occur. A foreshadow of this future was the 2011 purchase by Wellpoint, one of the five largest for-profit insurers, of CareMore for $800 million. CareMore is a Medicare Advantage health plan headquartered in southern California with facilities in Arizona and Nevada. It delivers very high-quality care at costs that are about 20% below competitors. Presumably, in anticipation of developing efficient delivery systems, Wellpoint wanted the 'secret sauce' on how to deliver high-quality, low-cost care to a sick population. Similarly, hedging its bets, Optum owns physician practices with about 5,000 primary care physicians and is on its way to developing integrated delivery systems in 75 different health care markets.

In January 2012 Jeffrey Liebman and I predicted in The New York Times the end of health insurance companies by 2020. We might have been a bit optimistic-or provocative. But it is certain they will end. Insurance companies will largely cease to be the middle man-taking premiums, paying providers, saying no to consumers, and making a profit-that we blame. Whether we will come to love them is another matter. That depends on how well they actually care for patients.Some people may be concerned about the prospect of having to choose among large integrated delivery systems with selective physician and hospital networks. The worried well might wonder what happens if they contract a serious illness, such as cancer or some rare disease, will they be restricted only to the physicians in the delivery system? We should note that many people pick Kaiser or Group Health and get all of their care from those integrated systems, and they don't seem to worry that they are not getting the highest-quality care. The real issue is not whether there is a selective network of physicians and hospitals; the real issue is whether the network is of high quality. Having the assurance of a high-quality network is the key. These integrated-delivery systems will begin competing with their objectively validated, high-quality networks.

More importantly, health systems have learned from the managed-care backlash; just saying 'no' really aggravates people, especially well-off, powerful people. Although it may be cheaper in the short run, it can be expensive, especially in terms of reputation, in the longer term. There are better ways to approach this.

I suspect these integrated delivery systems of the future will adopt two strategies. For rare but serious conditions they will identify recognized centers of excellence-the absolute best places in the country- and contract special arrangements for the referral and treatment of their patients. These centers of excellence may have slightly higher sticker prices, but forging these special arrangements will be worth it for integrated delivery systems because then they will be able to boast negotiated rates, better outcomes, and fewer complications. Second, richer and, thus, more expensive benefit packages, such as platinum plans in the exchanges, would cover second opinions. In addition, there will be a market for supplemental insurance that covers second opinions for serious conditions. The well-heeled and worried will be a prime target for such plans.

So be prepared to kiss your insurance company good-bye forever.

Excerpted from Reinventing American Health Care: How the Affordable Care Act will Improve our Terribly Complex, Blatantly Unjust, Outrageously Expensive, Grossly Inefficient, Error Prone System by Ezekiel J. Emanuel. Available from PublicAffairs, a member of The Perseus Books Group. Copyright © 2014.