Medical Insurance Markets:

How to make your insurance company survive the coming market correction.

For the last year, there has been significant tension between Premier Health Partners (PHP) and WellPoint, previously known as Anthem, one of two major insurance providers in my area. The medical insurance market is an excellent example of a differentiated market. Prior to the PHP/Wellpoint controversy, PHP employees could choose United Health Care or Wellpoint - but both plans were identical in costs and benefits. The differentiation arises in the network of providers outside of PHP.  

Since PHP and Wellpoint are currently not working together, PHP has been betting on the differentiation (the providers Wellpoint customers USED to have access to) to be enough of a draw to cause patients to switch.  If our patient volumes are any indication, this doesn’t seem enough of an incentive to offset the opportunity cost of switching providers or possibly paying a higher premium.  Therefore, few businesses have seen the opportunity cost of switching exclusively to UHC (or another provider) as worthwhile.

That "or another provider" brings us to the other major factor of differentiation - reliability and name recognition.  Wellpoint and UHC share roughly equivalent reputation in those respects here, so there's little difference between the two.  Smaller outfits aren't as well known to the general public and may raise the percieved "cost" of switching to a previously unknown company.  In this respect, it resembles long distance rates in the mid-90's.

At that time, most carriers charged somewhere between a dime and quarter a minute. There were smaller companies who provided cut-rate fees (as low as $0.049 in 1994). Yet many people stayed with the extortionary prices of AT&T, MCI, or Sprint. One might save a bunch - but find out there's no customer service.  The uncertainty was too great for most people, who avoided the hassle – until the smaller companies got enough reputation.  Then the whole system went nuts.

I suggest that the medical insurance market is in a similar state.

Further, the presumption that full-time work brings medical benefits is getting shakier and shakier by the year. At the very least, premiums are increasing to the point that many lower-wage workers are unable to afford them. This will inevitably lead to lower volumes across the board, save for those in extremis.

Add to this the near-certainty that both UHC and Wellpoint are running for maximum profits, like practically all corporations.

This scenario, if accurate, would be disastrous to PHP’s current operations. It is likely that, without other change, insurance premiums will rise and payments to medical providers will fall (affected both by dropping volume and lack of coverage). The market will surely end up correcting, but only after significant damage to both the insurers and health care providers.

Adopting a longer-range outlook, and learning from the example of the telephone companies in the 90’s, insurers and health care providers can take action now to provoke that market correction and be ahead of the game. For example, in 2004, Larry C. Glasscock of WellPoint (Anthem) made $16,713,605 in total compensation, and William W. McGuire (United Health Group) made $58,784,102 in total compensation. These items indicate that the major health insurers in the Miami Valley follow a typical pattern in corporate America, with CEOs and other executives earning far more than the historical gap between front-line workers and executives. Equalizing that gap could not only stabilize the futures of the companies, but create personal wealth for them as well.

If a single insurer, perhaps partnering with a large healthcare consortium, were to reduce their profit margin (by a percent or so) and cut executive expenses – ensuring that service stays the same or improves, by keeping worker’s salaries the same - they would suddenly provide a case for overcoming the "opportunity cost" of switching.

They'd stand to make a bundle in volume (making up the profit margin) and be able to present themselves as “putting customers’ health first” - while reducing risk to shareholders (including the CEOs who have millions in stock options) by ensuring corporate solvency for the mid-range future. By simply cutting rates, smaller providers who already have those lower rates (but not the name recognition) and wouldn't gain much, or might even implode.

Source for CEO wages