Health Insurers Reinvent Themselves As Money Managers
Managing that money is more profitable than offering health insurance.
As if they weren’t screwing us enough already… WellPoint Inc., the nation’s largest health insurance company, ran into a snag last year while pursuing an important new business initiative. Federal banking regulators insisted on classifying WellPoint as a healthcare company. And that was interfering with its efforts to open a bank. The Federal Reserve Board eventually agreed that the company’s core insurance business could be considered financial services. WellPoint finally convinced the Fed that its mail-order pharmacy and its program for managing chronic diseases were merely “complementary” to its main business — financial services. It pledged to limit them to less than 5% of total revenue.
Insurers are moving away from their traditional role of pooling health risks and are reinventing themselves as money managers — providers of financial vehicles through which consumers pay for their own healthcare. Like home and auto insurance, traditional health coverage is based on shared risks within broad populations of customers: a small proportion with big medical expenses and a large majority with few or none. Premiums paid by the latter help pay the costs incurred by the others and provide a margin of profit. In theory, this system serves everyone’s interests, because people generally can’t know in advance which group they’ll fall into.
Insurance companies began remaking themselves as administrators, providing employers with expert help in processing claims and negotiating rates with doctor groups and hospitals. Profit margins on these services are high because the companies can charge fees without assuming the cost of underwriting customers’ medical needs.
Among the signs of the change is the growth in health savings accounts, which allow individuals and families to pay out-of-pocket medical expenses from tax-exempt savings. As with individual retirement accounts and 401(k) plans, the money in HSAs tends to sit for long periods and can be invested in mutual funds and securities.
“There’s fees for managing the account, transaction fees, fees for investing the funds,” says John Casillas, director of the Medical Banking Project. “You’re going to see many billions of dollars moving from premium payments to professionally managed investment funds under HSA rules. Some people think that banks are going to threaten health plans by replacing them in the marketplace.”
Hence the rush by medical insurers to open their own banks. To help foster this change, the insurance industry developed a new form of health plan carrying a low premium and a deductible (the amount a customer must pay out of pocket each year before the insurance kicks in) of $5,000 or more.
Under the rules, contributions to HSAs are tax-exempt, as are their investment gains. Withdrawals are also tax-exempt if they are used for qualified medical expenses. Over time, HSA balances could grow to hundreds of thousands of dollars.
