Insurance Companies Dancing Without Touching

Paul Levy

First published 3/21/11 on [Not] Running A Hospital

A story in the Washington Post talks about health insurance companies seeking new lines of unregulated business as the profitability of health insurance falls and as more and more requirements are placed on that line of business as a result of the federal health reform law. Here’s an excerpt: “Insurers have moved into technology, health-care delivery, physician management, workplace wellness, financial services and overseas ventures in wide-ranging efforts to mitigate the new rules imposed by the law.”

I raised some of these issues several months ago, where I also suggested that a merger of the Number 2 and Number 3 Massachusetts health plans might be forthcoming. Well, they tried, but decided not to, as they announced a few weeks ago.

Meanwhile, Blue Cross Blue Shield of Massachusetts is clearly laying the groundwork to shed its non-profit status. And, really, why not? It is in no way a charitable organization of the sort envisioned in earlier years, and the constraints of being a nonprofit bind in a number of ways.

When the HPHC and Tufts merger fell through, the operative statement was: “We have now determined that we are stronger as individual competitors than one company.”

I predict that will turn out to be a strategic error. In the new world order, scale matters. This statement is, to me, revealing in its own way: “Our operations are very different and, in many important aspects, not fully compatible without significant changes to existing processes and applications.” In other words, they chose not to merge because it felt like it was not currently cost-effective to change. This suggests that the operations of the two plans as presently configured are not scalable. But if they don’t merge, they will be left behind by those with stronger market power. For now, that is BCBS of MA. In the future, as the business becomes less about taking on insurance risk and more about other services, it could well include some major national players as well. Now, rather than later, would be a better time to consolidate assets and use the cash on hand to make the investments that will be needed to grab market opportunities in the future.

Paul Levy is the former CEO of a large Boston hospital. He writes at [Not] Running A Hospital.

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