More employers opt to self-insure

INSURERS OFTEN BLAME the federal government for their eroding market share. While health plans might point to legislation and expansion of public programs as a hindrance, an increase in administrative services only (ASO) arrangements is taking a bite out of the business as well, according to Carl Mercurio president and publisher of New York-based Corporate Research Group.

Insurers have seen their fully funded business shrink from just over 49% of their operations in 2007 to 45% in the first six months of 2011, according to a CRG analysis of 125 million individuals covered by 22 managed care organizations.

Companies are asking what they're really getting from an insurance company for the premium dollar. Some find it is better to just assume the risk and pay the claims processing fees.

Increasingly employers think they can better control risk and save on costs by bringing the business in house, he says. That's a major concern for insurers. While insurers capture the entire premium in a fully funded arrangement, they collect a much smaller fee when they provide only administrative services.

In addition to the shift to ASO, employers are likewise moving toward high-deductible plans that are compatible with health savings (HSAs) and health reimbursement accounts (HRAs). Because these plans have lower premiums, they garner lower profits than more traditional fully funded lines.

These structural shifts, which predate healthcare reform, are having a significant and growing impact on insurers' profitability, Mercurio says.

"As these numbers start to increase, it could have a dramatic effect on the health insurance industry on an aggregate basis and it's one of the things that is diluting the long-term prospects of the industry," he says.

The other factor, of course, is health reform. While reform is expected to raise commercial enrollment, it will likely pinch profit margins by forcing individual and small group lines to offer more commoditized benefits through health insurance exchanges, Mercurio says.

Citing Wellpoint data, he notes that the commercial insurance market is expected to grow from about 173 million members in 2010 to about 179 million members in 2015. Nearly all of that growth-11 million members-will come from the individual market as the small group market is expected to contract and the large group market is expected to increase only a fraction.

Mercurio estimates the move to exchanges, coupled with higher taxes and medical-loss ratios that cap profitability, could shave an additional 25% to 30% from insurers' bottom lines.

In light of those challenges, he says insurers need to shore up their core business and expand into other non-health insurance businesses. Many, including Wellpoint, Cigna and Aetna have already begun to diversify, he notes, with UnitedHealth Group leading the pack.

-Shelly Reese