Health Insurers Shine In Obamacare Era

The much awaited Supreme Court ruling in favor of Obamacare’s subsidies has removed the cloud of uncertainty that was hanging over the sector. After its share of ups and downs, the health insurance industry is finally on its growth trajectory. Healthcare reform, which was initially rebuffed by the industry players, has turned out a net positive for them. Courtesy of Obamacare, the players have witnessed their membership enrollment rise by leaps and bounds.

Now, after five years of staying with Obamacare, the insurers have changed their outlook to positive toward the law and have also provided technical assistance to the government when the public exchange suffered glitches during its debut. Most of the players are now looking for newer avenues to grow their business. They are re-examining their entire business model from pricing, product innovation, risk management, distribution and claims management for a realistic pace of growth.

The trend of share price movement of the biggest four health insurance companies also attests to the fact that the market has been optimistic about the ultimate effects of the law on the health insurers. While the S&P 500 index has gone up 77% since the passing of the bill, United Health Group (UNH), Aetna (AET), Cigna (CI), Humana Inc. (HUM) and Anthem Inc. (ANTM) have outperformed with 292%, 277%, 321%, 332%, and 180% gains, respectively.

Let’s discuss some of the opportunities faced by the changing industry landscape:

Supreme Court Removes Uncertainty

Yesterday, the U.S. Supreme Court’s 6-3 decision upheld the subsidies that were given to those enrolled via the federal exchanges. The case, King v. Burwell, No. 14-114,  pointed to the text of the law which stated that only those individuals insured under state-established exchanges would be eligible for federal subsidies. However, customers who enrolled via 34 states that did not set up their own exchanges also got the subsidies. The case challenged the legality of these subsidies.

The ruling not only established that the subsidies will stay, it also confirmed that customers will continue to receive subsidies even if they buy insurance on state exchanges.

The decision is a net positive for health insurers who would have faced an outflow of members had the subsidies been scrapped. The removal of the subsidies would have caused a "death spiral" as healthier people then would have less incentive to participate in the market.

Keeping the subsidies intact will make insurance more affordable for both groups of people -- healthy or sick. This combination will improve the customer profile of health insurers and enable them to dilute the risk among a larger pool of members, thus reducing their claim cost.

Bigger Pool of People Coming into Insurance System

The nation’s uninsured rate has plummeted since the Affordable Care Act (ACA) took effect. Before ACA, around 47 million Americans lacked health coverage. The latest available data shows that the uninsured rate has been the lowest since Gallup and Healthways began tracking in 2008. The uninsured rate was 11.9% during the first quarter of this year, down 1% from the previous quarter and 5.2% points since 2013, right before the Affordable Care Act went into effect, according to the findings of a Gallup-Healthways Well-Being Index poll.

Though the data clearly shows that Obamacare has accomplished the purpose it was primarily designed for, it also points to the huge insurance coverage provided by the health insurers in the course. A reduction in uninsured rates implies membership gains for the insurers which go on to fatten their top line. Most health insurers have reported a secular rise in their revenues from membership gains because of the law.

Individual/Public Exchange Reigns

Individual/Public Exchange was created under the ACA, often called Obamacare, to provide insurance to individuals and offer subsidies based on income levels. It is anticipated that between 2015 and 2019, the Individual/Public Exchange segment will experience the highest membership growth as it benefits largely from the uninsured gaining coverage via Public Exchanges. Most big players recently stated that Public Exchanges continue to offer them profitable growth.

During first quarter earnings season, Aetna management commented that it had another highly successful open enrollment period in its public exchange business, growing its membership to over 950,000, and exceeding its initial projections. UnitedHealth has also expanded its Public Exchange footprint to about two dozen states this year from four in 2014. Its larger presence better positions the company to gain new business in one of the faster growing segments: Public Exchange.

Medicaid Expansion

The expansion of the Medicaid program in 2014 presents an opportunity for the large participants. The ACA expanded Medicaid eligibility beginning 2014 to nearly everyone under the age of 65 with income up to 138% of the federal poverty level. Insurers have welcomed new Medicaid members as growth has slowed in their conventional employer benefits business.

UnitedHealth Group Inc. and Anthem Inc. are among the largest Medicaid providers. Other companies that have traditionally focused on employer-based coverage may seek to enlarge their Medicaid plans.

Rising Senior Population = Growth in Medicare Segment

The Centers for Medicare & Medicaid Services estimates that Medicare Advantage membership will rise 26% from this year to 68.4 million in 2023.  Revenue from the managed-care plans of Medicare Advantage is expected to grow significantly as baby boomers retire. Medicare Advantage is a privately run version of the government's Medicare insurance program for the aged and disabled.

Until now, only two of the public providers -- UnitedHealth and Humana -- control more than 10% of the market. However, we expect sharp consolidation in this market. Carriers in the health insurance sector are in a race to win Medicare Advantage market share and the fastest way of achieving the target is by acquiring a company in the same business.

Shift to International Markets

Stiff competition and pressure on profit margins in the U.S. market have led American health insurers to look to foreign markets for sustained growth and profitability. International markets seem attractive as these are less penetrated and competitive compared to the U.S. Asia and Europe represent the best near-term opportunities for the U.S. health insurers. Cigna, UnitedHealth Group, Aetna, Humana are all spreading out to international markets. These players have penetrated foreign markets via mergers and acquisitions or joint ventures.

Some of the deals made by players in this field echo the emerging trend toward globalization. In April 2014, Aetna bought U.K.-based InterGlobal, which offers private medical insurance to groups and individuals in the Middle East, Asia, Africa and Europe. Prior to that in February 2014, Cigna announced its debut in India's underpenetrated health insurance sector, in a joint venture with an Indian conglomerate TTK Group. In 2013, UnitedHealth bought a stake in AmilParticipacoes of Brazil for a nearly $5 billion. It already had a presence in Australia, the Middle East and U.K.

Insurers Embracing ACOs

Health insurers are trying to clinch accountable care payment contracts following the 2010 healthcare reform law's inclusion of ACO tests under Medicare. The law’s emphasis on providing accurate and efficient health care service rather than volume of service has led to the emergence of ACOs.

These are formed when a group of health care providers (physicians, hospitals, non-physician providers, etc.) collectively agree take responsibility for the financial and quality outcome for a defined population.

ACOs are appealing to insurers as these reduce medical cost and improve outcome. Insurers form an essential part of ACO since they possess huge patient data, which if shared among the providers makes it easier to manage care lower the medical cost.

With Obamacare, the role of health insurers have evolved and now they cannot be just a claim payer. Under health reform, insurers have lost flexibility in ways that they can cope with rising medical expenses. They can no longer rely on many of their traditional medical underwriting strategies, such as exclusion of pre-existing conditions. The most effective approach for insurers now is to rely exclusively on current cost control mechanisms to manage members’ medical expenses and an ACO serves here best.  

Private commercial payers, such as Cigna, Anthem and Aetna are thus supporting ACO formation. CIGNA has one of the most established track records in the group for ACOs. On average, these companies have been able to hit 2% cost savings and 3% quality improvement targets within 2 years of the ACO start.

In Jun 2013, UnitedHealth Group said that it aimed to spend about $50 billion on accountable-care contracts by 2017, compared with $20 billion then.

Developing Ancilliary Businesses

Insurers are eyeing growth and expansion opportunities that accompany the critical challenges of modernizing the health care system. They are branching out into non-traditional areas.

Over the last few years, several large insurers have acquired companies that fall outside the realm of traditional health insurance yet complement it. Humana acquired Antiva in 2011 to provide analytics services, Aetna invested in Health IT by acquiring Medicity and UnitedHealth has the broadest approach to and the greatest potential in cross-selling synergies via its health benefits business via Optum.

The Optum division is the poster child of UnitedHealth, boasting successful diversification. The unit includes OptumInsight, a health care analytics company, OptumHealth, which provides health management and wellness services, and OptumRx, a pharmacy benefit manager.

Consolidation Remains Rife

The ACA has given rise to the unprecedented mergers and acquisitions leading to market consolidation.

The influx of a previously huge uninsured population into the space has increased overall membership. Now the players are scrambling to maintain and further grow their member enrollment and the best way to achieve this is by growing in size.  With the health care law emphasizing value-based care, it becomes imperative for health insurers to have a large number of patients to spread risk, and improve overall health outcomes.

Moreover, a bigger size would help in leveraging fixed cost thus reducing overall administrative cost. A bigger market share will also equip them better to negotiate harder with hospitals. "Get big or get out" has therefore become the trend in the industry.

The merger frenzy hit a fever pitch this month with news of Anthem making a bid for Cigna which it refused to accept, Aetna offering to buy Cigna, and UnitedHealth Group proposing to take over Aetna. The market is speculating that the “big five” insurers will merge into a “big three,” likely comprising Aetna, Anthem and UnitedHealth.

Bottom Line

Thus we see that health insurance as an industry is primed for revolutionary change. Fewer players, proliferation of value based provider payment models and growth of retail market places will be seen which will result in a consumer empowered health care system.