The employer threat to health insurer profitability

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When Amazon, Berkshire Hathaway and JPMorgan Chase announced their plan to form an independent healthcare company for their employees in January, the share prices of insurance and healthcare companies fell sharply. The implication was that the three corporate titans were partnering out of their collective frustration with rising health insurance costs and the lack of transparency with regard to healthcare pricing.

The drop in share prices was a reversal for the four largest publicly traded insurance carriers, whose market value has steadily risen since the passage of the Affordable Care Act in 2010.
In this respect, it is noteworthy that these companies health plan offerings fall primarily into three market segments: individual coverage, Medicare, and employer plans.

During the seven years since the ACA’s inception, the carriers have lost billions of dollars in the individual coverage market, demonstrating that they are not able to accurately price individual policies under the law’s constraints.

Medicare operates on a fixed fee schedule, and while this segment is stable and profitable for the major carriers, it offers them limited growth potential. So, if you are one of these insurers, where do you turn to generate your growth?

According to a 2016 Kaiser Family Foundation study, 49% of Americans receive their health coverage through their employer. The remaining 51% obtain coverage from non-group (7%), Medicaid (19%), Medicare (14%), other public coverage (2%) or are uninsured (9%). In other words, the employer segment is the insurance companies largest market by far and, taking into account what we know about the profitability of the individual and Medicare segments, the employer verticle looms large as the carriers most important source of profits.

“Zugzwang” is a chess term that describes a situation where a player is forced to make a move that puts him at a disadvantage. Compelling the opposing player to make such a move significantly weakens his position.

Given the importance of the employer market to overall insurer profitability, an attack on this revenue stream from a more diverse competitor has the potential to pose serious problems for the major carriers. If Amazon, Berkshire and JP Morgan understand how carriers and providers are vertically integrating the healthcare supply chain—to wit, Cigna’s announcement last week that it will acquire Express Scripts—and if these three companies threaten to put a sizable dent in the the revenue these companies derive from the employer segment, this could place the carriers in a position of “zugzwang:” Either they overhaul the most profitable segment of their business to counter the new disruptor or lose market share while they flounder about for their next move.

This is not the first time that carriers, providers and advisers have seen attempts by either private businesses or the government to reform the healthcare industry. But as costs continue to rise, these challenges become less about disruption and more about survival of the American economy. Amazon, Berkshire and JPMorgan may not ever replace the insurance carriers, but if they are successful, they will likely have reinvented the carrier business model—just as each of the three has done in their respective industries.

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