Is health insurance really insurance — and does it matter?
True insurance protects against catastrophic losses. Think of flood insurance covering the damage as the couch floats by the window, or a life insurance policy paying out after a loved one’s death. Health insurance slants more toward maintenance care, such as annual checkups, that the other insurances tend to avoid. Good luck getting your car insurance to pick up your 60,000-mile tuneup.
The different types of insurance have had similar means of funding. Customers pay a fee set according to risk level. Screening guidelines kept out the riskiest individuals and mitigated the overall level of risk the company would assume. The excluded might have included homes in hurricane-prone areas or individuals with a history of serious health problems.
But the Affordable Care Act, or ACA, is changing how private health insurers can screen patients and the premiums they can charge. That change is causing a new health industry shift that could redefine its future.
Redefining health insurance
Health insurance in the United States dates back to the Civil War era, when accident coverage proved popular enough to encourage more comprehensive private plans. But insurance as we know it started much later, following some innovations in the medical community. A look at that start helps explain the current path.
In 1929, a doctor at Baylor University Hospital in Texas noticed that teachers weren’t settling medical bills. So he started a system where the teachers could pay in a small amount, or a premium, and receive up to 21 days of health coverage The Baylor Plan began to spread as the Great Depression took off.
Cut to three decades later and a group of hospitals decided to merge their plans into one nonprofit called Blue Cross. The company faced increasing competition from private plans — which charged premiums based on level of risk — and soon adopted a similar business model. The methods of the private plans became the norm.
Insurers thrived in the new market and have continued to evolve over the years. Five companies have fought to the top of the heap as business boomed. Take a look at how those company’s performed versus the S&P 500 over the past 10 years.
Most of the companies have grown significantly over the past years thanks to acquisitions. Here’s how they stacked up in market position at the end of fiscal 2012.
|Company||Market Cap||P/E Ratio||Covered lives*, in millions|
|UnitedHealth Group Inc. (NYSE:UNH)||56.1 billion||10.37||40.925|
|WellPoint, Inc. (NYSE:WLP)||19.8 billion||7.97||36.130|
|Aetna Inc. (NYSE:AET)||16.9 billion||10.70||18.242|
|CIGNA Corporation (NYSE:CI)||17.7 billion||11.06||14.045|
|Humana Inc (NYSE:HUM)||10.9 billion||9.22||9.103|
But change is in the wind, thanks to the ACA, and insurers won’t have the same risk mitigation options. Under the new health insurance exchanges, insurers can’t deny coverage based on pre-existing conditions and have limits to how much they can increase premium charges due to a patient’s history.
The insurers’ long history of adaptation has come in handy.