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The restructuring of the health insurance industry.

With the Clinton administration leading the attack on health care reform, the business community is anxiously waiting to see what form these changes will take. Meanwhile, a recent study by Towers Perrin reveals that health insurance company chief executive officers (CEOs) foresee enormous changes in their industry - and an inevitable competitive shake-out. "To prosper in the future, health insurance industry executives will have to challenge the conventional wisdom as to what the industry is all about," declares Donald J. Santoski, a Towers Perrin principal. "We're going to see a fundamental restructuring of the industry."

Study Findings

The survey, which contains the responses of CEOs from commercial health insurers with health premiums in excess of $10 million and those from Blue Cross and Blue Shield plans, reveals that the respondents believe their industry will face a multitude of complex challenges over the next five years. When asked to identify the three most crucial issues facing the industry, 86 percent of the respondents listed regulatory and legislative changes, 85 percent mentioned the control of health care costs, and 63 percent named financial performance, notes Mr. Santoski.

A majority of the respondents believe that companies must make a significant investment in managed care in order to prosper in the increasingly competitive marketplace. "About 75 percent of the CEOs believe that investing in network-based managed care is absolutely essential for growth," says Mr. Santoski.

As a result, many of the CEOs predict that smaller firms and traditional indemnity companies that have yet to make these investments will have trouble adapting to the new industry environment. Mr. Santoski adds that many of the participants believe that preferred provider organizations (PPOs) will be the most popular managed care program over the next two years, but that point of service (POS) programs will assume the lead position in five years. The CEOs also expert a variety of new managed care products to be developed.

To prosper in the emerging market, health insurers will also have to increase their investments in information systems and even develop new ways to sell and market their products, says Mr. Santoski. "As the market undergoes a restructuring, some companies will leave the business, others will consolidate and there will be spin-offs of new companies, which could result in the development of firms that specialize in areas such as information services." Many of the CEOs report that their companies are focusing on developing or expanding network-based managed care products, instituting improvements in customer service and attempting to contain claims costs while reducing overall operating expenditures.

Cost Control

Of the 85 percent of the CEOs who believe that controlling health care costs is one of the key strategic issues facing the industry, only 14 percent believe they will be able to achieve these reductions. "Nevertheless, the CEOs report that they are pursuing a number of cost control measures," says Mr. Santoski. "For example, 59 percent of the respondents report that implementing provider reimbursement and risk sharing arrangements is one of the most effective ways to keep costs down." Other methods include cost sharing with employees, limiting access to providers and controlling cost shifting.

Forty percent of the CEOs also report that their companies are planning to implement outcomes management programs - which are an evaluation methodology for examining quality-of-care outcomes in health services - over the next five years. "As outcomes measurement becomes a key competitive variable for insurance carriers and group buyers, the public will eventually have access to this data," says Mr. Santoski. "A whole new industry could develop around this function."

In spite of cost cutting methods, most of the respondents are pessimistic about the future health of the industry, according to Mr. Santoski. In recent years, most companies in the health insurance industry have made little money above investment income. As a result, many commercial insurers are under increasing pressure from their boards of directors and stockholders to increase return on equity. Nevertheless, 65 percent of the CEOs are satisfied with their firms' current profit margins, although 66 percent believe that their profit margins will decline in the future. Some of the CEOs predict that managed care will offer opportunities for growth for some companies, says Mr. Santoski.

Fear of Reform

The survey shows that reform efforts are of particular concern to the respondents. More than 80 percent of the CEOs believe that the regulatory and legislative changes expected to occur over the next five years will negatively affect their companies, says Mr. Santoski. "There is concern among the CEOs that the new reforms will signal a more interventionist government approach to health care in the United States," he says. "Expect a big debate about the shape that these reform efforts should take."

The study also reveals that the CEOs believe an increase in regulation will reduce their companies' flexibility, as well as their ability to compete. "Many of the respondents are concerned that regulation will become particularly burdensome for the industry if it occurs on a state-by-state level," says Mr. Santoski. "For example, they believe that unfavorable reforms in a particular state would have a much greater negative effect on a local or regional company than a national carrier, which could simply withdraw its business from that particular state or focus on its core business in other states."

In regard to the reform proposals, well over 90 percent of the respondents oppose a single payer system, whether it operates on a state or federal level. Also, 60 percent of CEOs are opposed to any of the extant "pay or play" proposals, although about 50 percent predict that a federal pay or play plan is likely to be instituted by 1997. And although over 80 percent of the respondents favor Medicare and Medicaid reform, most believe that these reforms are unlikely to occur during the next five years.

In response to the threat of legislative change, 83 percent of the CEOs report that their companies are increasing their involvement in lobbying and regulatory efforts. Other strategies include participating in industry task groups, improving public relations initiatives and enhancing processing procedures for Medicare and Medicaid claims.

Considering the changes overtaking the industry, what can employers do to keep costs in line? First, companies must attempt to manage the expectations of their employees," says Mr. Santoski. "Since employees may not understand the intricacies of the health care system, employers must be more proactive in educating their people that cost sharing is essential to reducing health care expenditures." Cost sharing methods could include measures such as an increase in the use of managed care programs such as HMOs, and higher deductibles, he adds.
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Author:Christine, Brian
Publication:Risk Management
Date:May 1, 1993
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