Health insurers balance long- and short-term moves but can pharma?

by Daniel R. Hoffman, Ph.D.

Published June 8, 2015, 10:41 a.m. ET

Commercial success for a new drug brand increasingly depends on whether and, how much, third-party payers will reimburse for it. As more physicians work for large, hospital-based networks, their decision-making role in a drug's success passes to discriminating private insurers and those provider networks that are also offering insurance plans. For that reason it is worth looking at an important trend among health care insurers to see if it holds a message for pharma.

Apparently health insurers find their best profit margins in what they call the commercial market, that is, employers. In the words of a strategic analyst at a Blue Cross/Blue Shield in New England, "Commercial is still king, so any insurer that doesn't have a solid book of fully-insured [employee] lives is probably struggling to make money."

Medicare Advantage plans are also profitable for private insurers. What isn't so profitable is the individual and small group coverage the insurers offer under the Affordable Care Act.

Although commercial and Medicare Advantage currently produce substantial profits for private insurers, even now the sands are shifting in ways that will make these lines less lucrative for them.

Medicare Advantage is profitable because of a generous subsidy the federal government gives to insurers. The Obama administration wanted to end or drastically cut that gift for insurers a year or so ago because it represents an unjustified windfall. But the administration backed off after flubbing the rollout of the Healthcare.gov website in 2013.

Another reason they left Medicare Advantage alone is that it remains popular with consumers because of lower premiums than Medicare Supplement policies. But Medicare Advantage is not an unmixed blessing for consumers. In many ways it represents something akin to a Medicare HMO because it requires primary care referrals, in-network services, and other restrictions. Those are OK for someone who is age 65 or 75 and healthy, but if a person is over 85 and she suffers from a serious condition, it won't be comforting if she learns that, say, Sloan-Kettering has achieved the most success treating that condition but her Medicare Advantage plan won't cover her to get treatment there.

Now as the age cohort of people over 85 remains the fastest growing part of the US population, both the costs to government for subsidizing Medicare Advantage and its limitations for consumers will make this kind of coverage unsustainable. The BC/BS analyst in New England said of Medicare Advantage plans, "I've wondered for some time when the engine will run out on that gravy train."

Then as far as the commercial segment, the insurers know that only a minority of even large employers remain confident they will continue offering health benefits to their employees ten years from now. Even at this time, employers are cutting back on spousal benefits and making employees pay large annual deductibles before coverage kicks in. Sometime after 2020, most employers will just give a subsidy to their employees (what the insurers call a "defined contribution") and let them enroll as individuals on the exchanges.

Insurers know this and they hope to meet this demand for individual coverage by becoming more consumer-friendly. Right now they are actively planning for the day when more employees receive an allowance to buy health insurance from either multi-payer exchanges or through a single payer subsidy. Yes, insurers are contemplating the prospect of a dreaded, single-payer system, albeit one where they'd still suck out a profit.

When individual employees instead of corporate purchasing agents become the important health insurance buyers, it means that insurance companies trying to compete for that business must demonstrate service qualities such as simplicity, customer responsiveness, problem-solving experience and a user-friendly purchasing environment.

At the present time, health insurance firms maintain terrible capabilities in those service areas. For that reason many of them are trying to get up to speed because they know this new, consumer-based environment is inevitable.

But more is involved than just hiring customer service agents with good command of the English language and a willingness to solve customers' problems. At several Blue Cross/Blue Shield systems around the country, for example, badly outdated IT systems pose a big problem to preparing for the next decade. Many carriers do not have the resources required to transfer data for existing members to newer information systems. Sources at one BC/BS told us they cannot track members "longitudinally," meaning that if someone remains covered by this same BC/BS carrier, but she switches plans or employers, the insurer can't track her history as a "covered life" from prior years.

Now here's where this discussion of the changing health insurance environment gets especially relevant to pharma. At the same time as insurers are planning to develop customer service and IT capabilities for new products and a different customer base, they are also making some short-term moves to bridge their profitability until that day comes.

An example of that appears in the recent news that Aetna and Cigna are each looking to buy Humana because of the latter's large book of Medicare Advantage business. Although insurers know that the hefty profits from Medicare Advantage will disappear within the next ten years, the analysts at Aetna and Cigna have calculated that the profits from Humana's Medicare Advantage business during that decade will justify the high purchase price they will have to pay for the company.

Another BC/BS analyst said that this balance of short- and long-term initiatives represents the essence of what it takes to compete in health care these days. "A number of major changes will take place during the next ten years in health care," he stated, "and managers need to invest in areas and develop capabilities outside of what they're doing now. At the same time, they have to make profits during the next couple of years."

Pharma for its part remains fairly blind, deaf and dumb about the need to walk and chew gum in this manner. Instead the industry merely replaces the fading illusion of emerging markets that it fed to investors for a decade with the message that immuno-oncology and PCSK-9's will restore a perpetual 1995. Projections of the wider landscape in health care beyond the next five years rarely determine their operational decision-making. Top pharma executives may be well informed about the trends that lie several years ahead, but their genuflections to Wall Street constrain them to take actions directed exclusively at the shorter range.

"When that day comes," one pharma CEO smirked, "I'll be gone and you'll be gone."

Maybe so, but he can't offer the same assurance about his company. Then again, the prospect of another company acquiring his pharma doesn't keep him up at night or change his management approach. That's because his contract guarantees him a huge payout if his company is acquired. In that case, only his employees would be at risk and a concern for their well being always ranked fairly low for him.