Health insurers reinvent themselves as money managers
Los Angeles Times
David Bess, a respiratory therapist from Grass Valley, Calif.,
wears a fake head bandage as he demonstrates at the America's
Health Insurance Plans convention at San Francisco's Moscone
Center. The protest, called Day of Denial, focused on the
control that health insurers have over medical care.
Many rush to open banks as more Americans open health savings
accounts, a tax-sheltered way to pay medical bills. Managing
that money is more profitable than offering health insurance.
Los Angles Times
By Michael A. Hiltzik
October 22, 2008
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.
FOR THE RECORD:
Insurance firms' revenue: A chart accompanying an article in
Wednesday's Section A on health insurance companies opening
banks incorrectly gave figures on revenue from premiums for the
four largest firms in millions of dollars rather than billions
of dollars. The correct totals: WellPoint, $55.9 billion;
UnitedHealth, $68.8 billion; Cigna, $8.7 billion; and
Aetna, $23.5 billion. —
The Federal Reserve Board eventually agreed that the company's
core insurance business could be considered financial services.
But what about its mail-order pharmacy and its program for
managing chronic diseases, which was overseen by WellPoint
doctors and nurses? Wasn't that healthcare?
WellPoint finally convinced the Fed that those activities were
merely "complementary" to its main business -- financial
services. It pledged to limit them to less than 5% of total
That a medical insurer would agree to keep a lid on healthcare
expenditures so it could get approval to open a bank illustrates
a fundamental change in the industry: 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
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.
For several decades, health insurance has been retreating from
A sea change occurred in the 1970s, when large employers began
self-insuring medical costs, in part because a new federal law
exempted self-insured plans from state regulation.
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'
A similar change is now rippling through the rest of the health
insurance market, driven by federal tax breaks for individuals
who pay for their own routine medical care.
"This is a turning point," said Jacob Hacker, a professor of
political science at UC Berkeley who has written extensively on
healthcare reform. "It's a fundamental shift away from the idea
of broadly shared risk. It's going to lead to a complete
transformation of the health insurer, which will be increasingly
focused on providing management of money."
Wealth in health savings accounts
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.
HSAs are different from flexible spending accounts, which allow
employees to set aside tax-free dollars to pay deductibles and
other medical expenses. At the end of the year, any unspent
money in a flexible spending account is lost. In contrast, money
in an HSA can carry over year after year indefinitely.
Federal tax rules for HSAs were liberalized in 2003, making them
very attractive to well-heeled taxpayers. Commercial banks such
as Bank of America and Mellon Bank, seeing the opportunity to
collect management fees on the accounts, jumped into the
"Every bank wants to increase its share of HSAs," said John
Casillas, director of the Medical Banking Project, a Franklin, Tenn.,
organization that helps medical administrators develop financial
"There's fees for managing the account, transaction fees, fees
for investing the funds," Casillas said. "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.
"This is an offshoot of what's going on in the market," said
Kelvin Anderson, chief executive of OptumHealthBank, founded in
2005 by UnitedHealth Group, owner of PacifiCare and other health
"Our choice was either to start a bank or partner with a third
said in an interview. UnitedHealth chose to start its own bank,
he said, to "provide better service to the customer."
The company also stands to collect fees for maintaining the
accounts, handling some disbursements and investing the balances
-- and for overdrafts, electronic transfers, even printed checks
and monthly statements.
OptumHealthBank has attracted $600 million in health savings
account deposits from nearly 400,000 customers. The bank
collected more than $34 million in service charges on those
deposits in the year that ended June 30, according to its
reports to federal banking regulators. Over the same period, it
earned $46 million in interest and produced a profit of nearly
$33 million for its parent company.
That's a small fraction of UnitedHealth's $4.6 billion in
overall profit last year, but it required a capital investment
of just $35 million. Moreover, the business is growing fast:
Deposits have more than doubled in the last 18 months.
OptumHealthBank was the first bank to be chartered by a medical
insurer, but it did not have the field to itself for long. Blue
Healthcare Bank, funded by 33 of the 39 member plans of the
Chicago-based Blue Cross and Blue Shield Assn., was chartered as
a Utah-based thrift last year, and WellPoint's Arcus Bank
received approval from the Federal Deposit Insurance Corp. this
Arcus is still awaiting formal approval from state regulators in Utah, its home state, but
expects to be in operation within six months, said Chief
Executive James Rowan.
Utah has been
the state of choice for the new charters because state law
allows non- financial companies to establish state banks without
subjecting the parent company to supervision of federal bank
Last year, however, the FDIC imposed a moratorium on granting
deposit insurance to such banks unless they were owned by a
financial services company -- hence WellPoint's attempt to show
that its principal business was financial services, not
WellPoint had to make that case to the Federal Reserve Board to
get a waiver of the FDIC moratorium. In the end, the company
reached an agreement that allows it to obtain no more than 15%
of its revenue from pharmacy services and disease management,
triple the limit initially set by the Fed.
Rowan and Anderson
say their banks will benefit customers by offering health
savings accounts and healthcare coverage under one roof.
"We want the customer to be empowered," Rowan said.
Whether these new services represent a solution to the nation's
healthcare crisis is widely debated.
Health savings accounts are "a step backward," said George
Halvorson, chief executive of the giant Kaiser health plan
system and outgoing chairman of
Health Insurance Plans, the health insurance industry's
Washington-based lobbying arm. He calls the medical banking
trend "off the point of where we need to go" to provide medical
coverage to all Americans.
That's because HSAs and their related health insurance policies,
which carry high deductibles and offer bare-bones coverage, are
particularly beneficial to healthier, younger and wealthier
customers. If these customers abandon the conventional insurance
market, they will trap those with chronic or serious conditions
in a shrinking, high-cost insurance pool.
"Eventually it will be harder and harder to find individual
policies that aren't high-deductible plans," said Timothy S.
Jost, a law professor at Washington and Lee University in
Lexington, Va., and a critic of health savings accounts. "Those
plans are great if you're healthy. Other people will find that
they have access to health insurance but not healthcare."
HSAs are rooted in a conservative principle called
"consumer-directed healthcare," the notion that healthcare
expenses have been rising in part because most American
consumers, who receive health coverage as an employment benefit,
don't know how much their care actually costs.
If Americans paid for more healthcare out of their own pockets,
the argument goes, they would become more frugal and
discriminating. They would avoid seeing doctors for trivial
complaints, insist on generic drugs rather than costlier brand
names and seek out cost-effective treatments, not fashionable or
experimental therapies, even for serious conditions.
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.
The new plans offer fewer overall benefits than traditional
plans. They are designed to cover chiefly catastrophic medical
expenses. Routine medical care becomes the responsibility of the
consumer. Some of the plans exclude maternity benefits,
preventive care and mental health services.
The federal rule changes in 2003 required anyone opening a
health savings account to be covered by a qualified
high-deductible plan, giving the insurance industry a convenient
hook to market the products in tandem. The idea was that the tax
break provided by HSAs would give individuals a greater
incentive to buy a high-deductible plan.
Among the earliest promoters of HSAs were John Goodman of the National Center
for Policy Analysis, a Dallas
think tank that was instrumental in pushing President Bush's
Social Security privatization plan, and J. Patrick Rooney, a
libertarian insurance executive who had promoted a school
voucher program in his hometown of Indianapolis.
Their first victory came in 1996, when Congress approved a
four-year pilot program providing limited tax relief for what
were then known as medical savings accounts. Rooney and his
supporters pressed Congress to expand the concept. In 2003 they
succeeded. Contribution limits were raised sharply and indexed
to inflation. (In 2008, the limits are $2,900 for individuals
and $5,800 for couples.)
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.
Already, HSAs and high-deductible plans have made strong gains
in the marketplace.
America's Health Insurance
Plans, the industry lobbying group, reported that 6.1 million
Americans were covered by high-deductible plans by the end of
2007, a 35% gain from a year earlier.
Only a fraction of those customers have also opened an HSA,
however. That has led to charges from critics that the savings
accounts function more as a tax shelter for wealthy taxpayers
than as a tool to manage healthcare costs. A study this year by
the Government Accountability Office found that the average
taxable income among HSA holders as of 2005 was $139,000, more
than double the average for all taxpayers.
The GAO also found that average withdrawals per year were less
than half of contributions, suggesting that the account holders
were building up retirement savings.
'Nothing is covered, absolutely nothing'
There is evidence that enrollment in high-deductible plans has
grown not because the plans offer greater value but because they
are often the only plans that customers can afford -- and
sometimes the only plans an insurer will offer applicants with
chronic conditions such as asthma, diabetes or depression.
That reflects the experience of Alex Kipper, 55, of
Calif., an engineer who lost his
employer-provided health insurance during the dot-com bust when
he was laid off by a Silicon Valley
company. Since then he has eked out a living translating Russian
medical and technical papers on a freelance basis, earning
roughly $30,000 a year.
Because he has high blood pressure, Kipper found himself
virtually uninsurable. Fearing that he could be financially
wiped out in a medical emergency, he signed up for a bare-bones
policy that provides no coverage until his medical expenses
exceed $8,000 in a year.
His health plan's concession to preventive care was a $25
discount on a physical. Once diagnostic tests were included, the
fee for the checkup came to more than $300, Kipper said -- which
the health plan declined to pay.
He hasn't returned to a doctor's office in three years. He gets
his blood pressure medicine from the discount retailer Costco,
which charges him $15 for a month's supply. To renew his
prescription, he goes to a local free clinic.
Although the policy costs only $200 a month, "nothing is
covered, absolutely nothing," Kipper said. "This plan would be
fine if it was really cheap, like $25 a month. But not $200."
A 2006 survey by the Kaiser Family Foundation found that
although customers in high-deductible plans did cut back on
medical services overall, they tended to avoid arguably
beneficial services as well as purportedly wasteful ones.
They were more likely than participants in conventional plans to
avoid filling a prescription or to take less than the prescribed
dose, to skip a test, treatment or follow-up visit recommended
by a doctor, or to skip a checkup.
"The basic premises of consumer-driven healthcare are seriously
flawed," said Mark Hall, a professor of law and public health at
Wake Forest University Medical School, who contends that people
with serious medical conditions have little time or inclination
to search for the most cost-effective treatment.
"They're not consumers, they're patients. And when you're a
patient, you're not in a shopping mode. You have other things on
Hiltzik is a Times staff writer.