Indemnity insurance: down but not out - indemnity health insurance

Business & Health, May, 1996 by Harris Meyer

Indemnity health insurance is dead, right? Not exactly. About 30 percent of Americans with employer-sponsored coverage still opt for traditional plans. If you count those who are in PPOs, point-of-service (POS) plans, Medicare and Medicaid, then the majority of Americans still have coverage that allows them a broad choice of providers who get paid for whatever services they deliver. The fact is, indemnity insurance retains a stubborn appeal and a well-defined niche.

Even as managed care solidifies its domination, millions of Americans insist that they have a right to free choice of provider. And as managed care's warts become more noticeable, some analysts believe consumers could even demand a return to fee-for-service coverage. "Choice and freedom are part of our culture," says Ralph Smith, president of the Houston Health Care Purchasing Organization, a coalition of 40 large companies and 2,500 smaller ones. The conventional wisdom is that everyone will soon be in an HMO but, says Smith, "if you look closely you'll see the country is starting to turn in the other direction."

Smith's stance is extreme, but not completely beyond reason. Last year's Foster Higgins survey of benefits found that about two-thirds of companies with over 1,000 workers continue to offer indemnity plans. (Seventy percent of those plans are self-funded.) Still, indemnity enrollment is way down, from 49 percent in 1992 to 27 percent in 1995 at companies with 500 or more workers. Only 16 percent of the Foster Higgins respondents think they need to offer an indemnity plan to attract and retain employees. Indemnity is the sole option at just 15 percent of large companies, half the percentage reported two years ago.

But there are other forces at work preserving indemnity. The nation's 180 or so indemnity carriers from the 63 Blues plans to national giants like Aetna and Mutual of Omaha to regional carriers like Medical Benefits Mutual--remain a potent political force, especially in state legislatures. And they aren't rolling over to play dead. Instead, they are consolidating for greater efficiency, buying or teaming up with managed care firms, borrowing cost-saving techniques from managed care, streamlining administrative processes and redesigning benefits to stay competitive. They also retain a stable and lucrative niche administering employers' self-funded benefit programs. They stand to benefit greatly if tax-favored medical savings accounts (MSAs) become a reality in the next few years.

The way indemnity insurers try to preserve their niche will affect employer-sponsored benefit plans for years to come. What follows is an analysis of indemnity plans' place in today's health care landscape and how indemnity insurers are adapting.

JOINING FORCES

The big, old-line insurers have played both sides of the street for years. Prudential, CIGNA, Aetna, Travelers and MetLife (before the latter two merged their health products in 1995) moved to managed care throughout the late 1980s and early 1990s, even as they continued to sell indemnity coverage. CIGNA, Aetna and Prudential continue to use their strength as indemnity carriers and full-service insurers to attract and hold clients with a mix of the old and the new.

Many Blue Cross and Blue Shield plans took the same tack. Blues insurers now own or operate some 200 HMOs, PPOs and POS plans in almost every state. Of the 64 million Blues enrollees nationwide, nearly 30 million are in managed care. That still leaves over 34 million with indemnity coverage. In some geographic areas, indemnity occupies the larger share of the Blues business.

In the last year, a handful of leading health insurers have adopted a more aggressive survival tactic. Blue Cross and Blue Shield of Ohio, for example, agreed last month to a $230 million merger with hospital giant Columbia/HCA--the first liaison of its kind for Columbia and for any Blues plan. If approved by state regulators, the deal would give Columbia control of most of the Ohio Blues' operations and its 1.5 million covered lives, which are divided 60/40 in favor of managed care. Columbia will strengthen the Ohio Blues financially, with a $300 million infusion of cash reserves. But with hospitals making more money from indemnity insurance, it's not clear whether Columbia will seek to expedite the movement of the plan's indemnity policyholders into managed care.

Meanwhile, Aetna's $8.9 billion purchase of HMO giant U.S. Healthcare, also announced last month, is one of the largest deals ever to combine an old-line insurer with a cutting-edge managed care firm. Aetna gains managed care expertise, clout and market position that it's been struggling to build for several years. But the insurer brings a national presence, a full array of health products and strong employer focus to the deal.

Aetna's health business encompasses 11.4 million people nationwide: 4 million in indemnity coverage, 6 million in PPOs and 1.4 million in HMOs. Aetna serves an additional 10 million people through self-insured plans, utilization review contracts, disability and life insurance and behavioral, vision and dental carveouts. U.S. Healthcare brings 2.8 million fully insured enrollees.