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.
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 revenue.
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 healthcare.
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 this paradigm.
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' medical needs.
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."
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