In today's highly competitive health insurance marketplace, it's getting harder than ever to survive as a standalone, regional company.
Just ask Independent Health. The area's No. 2 health insurer is caught between No. 1 HealthNow New York, part of the national BlueCross BlueShield network, and third-place Univera Healthcare, which is affiliated with powerhouse Excellus Health Plans of Rochester.
Facing pressure to cut expenses and to invest in the technology demanded by consumers, Independent Health knew it couldn't do it on its own. The Amherst insurer found a partner, CDPHP, at the other end of the Thruway, and the companies believe their alliance is a model for the industry's future.
“We believe this has the potential to be transformative,” said Dr. Michael W. Cropp, Independent Health's president and CEO.
Insurance companies around the country are seeking allies, agreeing to out-and-out mergers or gobbling up smaller players in the industry. And insurance companies are forming partnerships with hospital systems and doctors' groups to lower their costs and to appeal to new members.
It's a get-big-or-get-eaten survival tactic that is spreading throughout the medical industry.
“Maybe alliances are the dating part before the merger, but I definitely see more mergers. Because it's going to continue to be a challenge for the smaller health plans to survive,” said Art Wingerter, president of Univera Healthcare in Amherst.
The federal Affordable Care Act has accelerated a period of rapid change in the industry, as companies vie to put themselves in the best position to benefit.
The full impact on customers, including the employers who pay a large portion of the nation's health insurance bill, is uncertain. But mergers raise the possibility of limiting choices and raising prices.
“The insurers need to have strength, so they can bargain with providers. But you don't want them to be so big that they're the only option if you're a person looking for insurance,” said John Holahan, a fellow in the Urban Institute's Health Policy Center.
More to come
The mergers and alliances come at a time when the health insurance industry is becoming more concentrated, meaning a smaller number of insurers has a larger share of the marketplace. And the consolidations are spreading into other corners of health care.
In 2001, nearly half of the nation's 40 largest health insurance markets were considered “highly concentrated” as defined by federal regulators, according to an American Medical Association analysis.
Seven years later, following a round of insurance-company acquisitions and mergers, a broader AMA study of 314 regions found 94 percent of them would meet this “highly concentrated” measure.
In addition to consolidations among insurers, some insurance companies are buying hospitals and doctors' groups in a form of vertical integration that boosts negotiating leverage and efficiencies of scale.
Over the state line in Pennsylvania, Highmark, the largest insurer in the Pittsburgh area, bought West Penn Allegheny Health System, that region's second-largest hospital system, last year following 18 months of vetting. And insurers such as UnitedHealthcare are buying physicians' groups.
“For years, doctors and insurers were enemies,” said Dr. Nancy H. Nielsen, a senior associate dean at the University at Buffalo's School of Medicine and Biomedical Sciences who previously served as Independent Health's chief medical officer. “Those days are changing.”
HealthNow New York and Univera Healthcare say their ties to larger networks offer important benefits for their members.
HealthNow, which had 458,000 members and $2.46 billion in revenue last year, has the BlueCross BlueShield license for the area.
That allowed HealthNow to turn to BlueCross BlueShield of South Carolina for a custom claims and benefit administration system that met the needs of a large client, said David W. Anderson, HealthNow's president and CEO. The system is expensive to build and wouldn't be used by many HealthNow clients, so tapping into the South Carolina setup made sense.
“We have a little bit of the best of both worlds,” Anderson said. “We do operate as independent Blues plans, but we have the scale of the national BlueCross BlueShield Association to utilize.”
Univera Healthcare is the smallest of the three insurers in local market share, with about 150,000 or 160,000 members. But the company is part of Excellus Health Plans, which has the Blues license in Rochester and has 1.85 million members statewide to go along with its $6.3 billion in 2013 revenue.
When Univera has run into weather-related problems, such as the October 2006 snowstorm, the company can transfer customer calls to Excellus employees in Rochester and Utica.
And larger carriers can spread their administrative costs across a bigger membership pool. Calculating administrative costs per member, per month – or PMPM – is one way to measure efficiency. Excellus had an administrative PMPM of $36.18 in 2013, for example. In contrast, the smaller Independent Health's was $62.09.
“I don't think I could survive at 150,000 or 160,000 members in today's environment,” said Univera's Wingerter.
Finding a partner
Independent Health's executives and board members sought a partnership with another insurer because they believed an alliance offers economies of scale while allowing the company to retain its independence.
That decision followed years of weighing options that included a merger, but not a sale to an out-of-town company, according to Cropp.
“We've always entertained the possibility that we might not be able to survive independently. So as part of my responsibility, and their responsibility, we have regularly looked at alternatives,” he said.
Independent Health and CDPHP, founded as Capital District Physicians' Health Plan, are both three decades old, with similar size – CDPHP has 450,000 members and 1,100 workers, while Independent Health has 371,000 members and 1,000 workers – and nonprofit status. There is no overlap in their coverage areas.
Independent Health had $1.84 billion in revenue in 2013, earning $19.6 million in net income after reporting a net loss of $50.1 million in 2012. CDPHP had a net loss of $44 million on $2 billion in revenue last year.
Independent Health and CDPHP say their alliance will bolster creative problem-solving and sharing of services.
For example, CDPHP is studying a fresh produce nutrition benefit, introduced last year by Independent Health and Tops Friendly Markets, to see if it works for the Albany market.
The companies said they don't expect to seek savings through layoffs, and they could hire more if the partnership allows them to grow. And Dr. John D. Bennett, CDPHP's president and CEO, said the companies want to target new customers in other parts of the state.
Going forward, the partners could make joint information-technology investments that cut each company's costs in half. That's important because health-insurance customers today seek access anytime, anywhere to their medical data.
“We're getting very sophisticated information. You can do an EKG, right now, with an app on your phone. So these kinds of things are really changing everything,” UB's Nielsen said.
Independent Health and CDPHP are maintaining their independence, with separate governing structures and risk pools. “With everything else that comes with a full-asset merger – the loss of that regional focus, the loss of that identity – we opted at this point in time not to do that,” Bennett said.
It remains an open question whether insurance-industry consolidation limits choice and leads to higher premiums, as critics contend, but the trend is worrisome to those who worry about its effect on customers.
In this area, the three dominant insurers spend more than required on members' medical expenses and receive high ratings for customer satisfaction, but some experts would like to see more options for local consumers and employers.
“A lot of people would argue already that there's not enough competition in the Western New York marketplace,” said Gregory D. Leifer, director of employee benefits for insurance broker Scott, Danahy Naylon Co. Inc.
Whether consolidation in the insurance industry leads to higher premiums remains an open question. Over the seven-year period when the prevalence of “highly concentrated” insurance markets almost doubled, the average, inflation-adjusted premiums for employer-provided family coverage rose 48 percent. But a 2012 paper in the American Economic Review found no evidence that premiums rise more quickly in more concentrated markets.
The insurers and their lobbying arm said consumers and employers have more to fear from consolidation among providers.
Hospital consolidation in the 1990s raised prices by at least 5 percent, and the price increased by 40 percent when the merging hospitals were near each other, according to a Robert Wood Johnson Foundation study cited by the Association of Health Insurance Plans.
Either way, as consolidations across the industry continue, the Urban Institute's Holahan said, “I think states are going to have to regulate these markets and the pricing that goes on.”