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Are Insurers Transaction Processors or Health Plans?

Just over a week ago, Joe Paduda over at Managed Care Matters took a close look at Coventry Health Care's second-quarter conference call and made an interesting observation: Not only do Wall Street analysts seem to think it's not much of a health plan, neither does Coventry itself. Instead, the mid-tier health insurer describes its business in terms that suggest it's not much more than a "transaction processor" -- that is, a firm primarily interested in pricing its policies far enough above medical costs to ensure some profit.

Coventry Health: Transaction Processor ExtraordinaireThis won't come as a great shock to anyone who's observed the industry for a while -- heck, I noticed something similar myself when I saw how casually Wellpoint describes its "health plan" business in the first quarter, and I was pretty new to the details of health insurance at the time. Still, Joe's point bears some unpacking, because if the health-insurance business has a future -- which seems very much in doubt at the moment -- it will involve abandoning this accounting-centric mindset and embracing an alternative destiny as a vital health-management resource for and partner to patients.

From Joe's post:

Out of the twenty or so questions after the management presentation, there was one - yes, one, that got anywhere close to actually inquiring about medical management. That questioner asked what Coventry could do or had done to deliver care to Medicare enrollees through an HMO at lower cost than thru the standard Medicare plan. Coventry Chairman Dale Wolf responded by noting that hospital days per 1000 members among Medicare HMO plans could be in the 900-1300 range, compared to standard Medicare rates of around 3000 days/1000.

That was it. No follow up question as to how they could do that, what the long term implications were, how that affected pricing, what the techniques were that delivered such a great result and could those techniques be used for commercial members.

In other words, Coventry seems to be doing something right in its Medicare HMO plans, which appear far more successful at keeping patients out of the hospital than standard Medicare plans. Of course, it's also possible that Coventry has just been lucky in enrolling a healthier HMO member population, and it might also be rationing care in subtle ways; there's no way to know from this exchange.

Still, it is pretty striking that neither the company nor the analysts wanted to follow up on that point, since if Coventry has found a way to help keep its members healthier, that's good both for them and its bottom line -- not to mention for the control of medical costs on a nationwide level. And yet... nada:

The entire conversation was about medical trend and how Coventry was fixing its pricing model to reflect higher trend, and if enrollment was going to decrease as a result. Not the factors causing medical trend and what Coventry was doing about it. Well, to be fair, there was a little dialogue about higher inpatient utilization and unit costs in Medicare, and higher hospital utilization on the commercial side. But if you were interested in Coventry's solution to same, you're out of luck. Not one analyst even asked.

If analysts don't know to ask the company why their costs are going up and what they are going to do about it and how that will play out, what, exactly, are they 'analyzing'?

"Medical trend" here refers to the dreaded "medical-loss ratio,"which is how insurers think about the cost of providing medical care as a percentage of premium income. Coventry's main issue during the quarter was an unexpected rise in its medical costs, and yet as Joe points out, most of the conversation on its conference call concerned what Coventry intended to do on the pricing front, as if it had no power whatsoever to influence costs.

Now, insurers have a deservedly bad reputation for earlier heavy-handed attempts to control costs via "prior authorization" and "utilization review," which cheesed off doctors and patients alike. Since a backlash in the mid-1990s, most insurers have simply thrown up their hands at cost control and passed along medical inflation to premium payers (primarily employers).

But we've learned a lot in the past 15 years about how much medical care is essentially unnecessary and often even harmful, and health plans -- real ones, that is, not "transaction processors" -- are in a perfect position to help patients and their doctors navigate a medical terrain that increasingly consists of complex cost-benefit choices. (At least, that is, insurers would be in the perfect position were they not so widely feared and hated, but that's a separate issue.)

So one of the major questions facing this industry is whether these old-line insurers can actually change their spots, or whether newer, nimbler companies will eventually supplant them. (Assuming the federal government doesn't simply put health plans out of business, of course.) In the meantime, health plans and their analysts could do worse than to ponder some of the questions Joe suggests should have been posed to Coventry:

Here are some of the questions they should have been asking.
  • What key indicators of medical trend do you watch closely?
  • Exactly what is your average inpatient days per thousand for each block of business and how does that compare to industry standards?
  • How about admissions per thousand?
  • What is driving trend? Is it unit cost (price per service), utilization (number of those services received by a member when they do get those services), frequency (percentage of members that get that service) or intensity (higher cost version of a technology or more expensive procedure type than expected)?
  • Which types of medical care are the biggest drivers: ancillary, physician services, pharma, inpatient, outpatient?
  • What is your plan to address those issues?
  • How will you measure results and when will you know if you've been effective?
  • What is Coventry doing about members with chronic conditions? How have your results compared to industry standards?
And the big one:

How would Coventry compete and win if it could not risk select and had to take all comers at a community rate?
Because that may well be the scenario Coventry, and all its competitors, face in two short years.

Update: Bob Laszewski notes further that Coventry execs used the phrase "sort of" to describe their business a total of 63 times during the conference call.