Big insurance companies should be nervous about their future

The likely prospect of divided government in Washington means that major health legislation is unlikely anytime soon. But this does not mean big insurance companies can count on the status quo for long. Three interlocking trends are conspiring to dramatically reduce the role of big insurance companies in the American health care system.

The first of these trends is a move toward capitated payments in health care. Capitation is an alternative payment model in which, instead of being paid per episode of care, doctors are given a flat, monthly, per-patient fee in advance that covers all needed care. Many independent doctors and doctors’ groups suffered huge financial losses during the pandemic because of a drop-off in patient visitations. However, the ones receiving capitated payments fared much better, which will lead to more doctors accepting these arrangements.

Capitation has other advantages. Reducing the administrative overhead and time spent submitting individual claims for each service provided allows doctors to focus more on preventative medicine and helping coordinate patients’ care. The result is lower costs because of better health outcomes, which is why some insurers are pursuing capitation as part of their push toward paying for value in health care.

The challenge for insurance companies, however, is that capitated payments from a third party raise a fundamental question for doctors and their patients: Why not cut out the middleman?

In fact, this is precisely what a growing number of Americans are choosing to do. Individuals and employers are paying direct medical care doctors a flat monthly fee to handle most of their medical needs and buying catastrophic or stop-loss insurance, respectively, for emergencies. In the past three years, the number of direct primary care practices has more than doubled to over 1,350, according to DPC Frontier.

Large health systems that offer the full continuum of care also are realizing that they can cut out big insurance companies. They do so in two ways. The first is a similar model to direct medical care doctors, where the health system directly contracts with self-insuring companies to be their employees’ exclusive regional medical provider in exchange for a capitated fee. The second is by creating their own insurance plan to compete in the individual and small group market.

These arrangements work to the patient’s benefit by flipping the current broken financial incentives in health care on their head. Instead of making more money the sicker the patients get, the health systems make money by getting and keeping their patients healthy. This motivates them to invest in the primary care and preventative services that help prevent chronic illness.

True, it is not easy to successfully operate a health plan. A 2017 analysis of provider sponsored health plans formed since 2010 showed that only four of 37 were profitable in 2015. The biggest challenge is enrolling enough covered lives to accurately predict claims.

This is where the second big trend in health care will come into play: continued consolidation of health systems. As hospital systems continue to merge and get bigger, more systems will offer their own health plans since they will have the larger service area needed to cover more lives. Because incentives are properly aligned to keep patients healthy, these provider-sponsored plans will have lower premiums and better benefits, making them more attractive to customers.

Of course, trading an oligopoly of third-party insurance companies for an oligopoly of provider-sponsored insurance plans is hardly ideal. But here is where the third big trend comes in: the development of a cash marketplace for health care services. Research by Larry Van Horn at Vanderbilt University has shown that cash prices for health care services are 40 percent lower than the allowed amounts negotiated by insurers.

New Health and Human Services rules on hospitals and insurance companies to disclose their negotiated rates and cash prices will super-charge this market. Platforms will be created to collect the data and enable easy comparison shopping, driving prices down. Look at the low prices for routine medical care at the Walmart Health Centers in Georgia and Texas, or for common surgeries at cash-based providers such as the Surgery Center of Oklahoma, and you get an idea of just how affordable health care can be in a transparent, competitive marketplace. 

This cash economy for health care will serve as an important check on provider-sponsored plans, forcing integrated health systems to offer genuine value to their customers. This is because for the first time, people will have a real, functioning market with competitive prices for health care to compare what they would have spent on health care in the cash economy versus what they spent on premiums.

For patients and employers, this new, dynamic marketplace of provider-sponsored health plans at integrated health systems competing against independent direct medical care doctors and providers in the cash economy will result in higher quality, more affordable care and coverage that fits their specific needs. For doctors, it will mean less administrative hassle and more time to spend with their patients. It is a win-win for everyone — well, except for the big insurance companies.   

Joe DeSantis is chief strategy officer at Gingrich 360 and leads their Bettercare Project. Follow him on Twitter @joedesantis.