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.
For The Record
Los Angeles Times Thursday, October 23, 2008 Home Edition Main News Part A Page 2 National Desk 2 inches; 55 words Type of Material: Correction
Insurance firms' revenue: A chart accompanying an article in Wednesday's Section A on health insurance companies opening banks incorrectly gave figures on revenue from premiums for the four largest firms in millions of dollars rather than billions of dollars. The correct totals: WellPoint, $55.9 billion; UnitedHealth, $68.8 billion; Cigna, $8.7 billion; and Aetna, $23.5 billion.
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."
Wealth in health savings accounts
Among the signs of the change is the growth in health savings accounts, which allow individuals and families to pay out-of-pocket medical expenses from tax-exempt savings. As with individual retirement accounts and 401(k) plans, the money in HSAs tends to sit for long periods and can be invested in mutual funds and securities.
HSAs are different from flexible spending accounts, which allow employees to set aside tax-free dollars to pay deductibles and other medical expenses. At the end of the year, any unspent money in a flexible spending account is lost. In contrast, money in an HSA can carry over year after year indefinitely.
Federal tax rules for HSAs were liberalized in 2003, making them very attractive to well-heeled taxpayers. Commercial banks such as Bank of America and Mellon Bank, seeing the opportunity to collect management fees on the accounts, jumped into the business.
"Every bank wants to increase its share of HSAs," said John Casillas, director of the Medical Banking Project, a Franklin, Tenn., organization that helps medical administrators develop financial service systems.
"There's fees for managing the account, transaction fees, fees for investing the funds," Casillas said. "You're going to see many billions of dollars moving from premium payments to professionally managed investment funds under HSA rules. Some people think that banks are going to threaten health plans by replacing them in the marketplace."
Hence the rush by medical insurers to open their own banks.
"This is an offshoot of what's going on in the market," said Kelvin Anderson, chief executive of OptumHealthBank, founded in 2005 by UnitedHealth Group, owner of PacifiCare and other health insurance plans.
"Our choice was either to start a bank or partner with a third party," Anderson said in an interview. UnitedHealth chose to start its own bank, he said, to "provide better service to the customer."
The company also stands to collect fees for maintaining the accounts, handling some disbursements and investing the balances -- and for overdrafts, electronic transfers, even printed checks and monthly statements.