Is Obamacare Ending Corporate Health Care As We Know It?

We are now just 11 short days away from state-run health exchanges opening for business as mandated under the Patient Protection and Affordable Care Act -- perhaps known better by its other name, Obamacare -- and the changes are really starting to add up.

Source: National Institutes of Health, Wikimedia Commons.

Less than two weeks ago, we looked at a growing corporate trend that was pushing retirees out of corporate-run health plans and into private health exchanges. The move -- which is being done by IBM and Time Warner among some of the more high-profile names -- is being made for two specific reasons. By supplying retired workers with a cash subsidy, these companies believe that they'll be allowing for greater health plan choices for retirees while also reducing their involvement (and money spent) on retiree health care. It's no secret that retiree health care costs are expected to rise, and pushing this group into the private exchange is a way for these companies to distance themselves from the time and money associated with locating optimal group health plans.

Is this the end of corporate health care as we know it?
Today, we can add another industry behemoth to the list in Walgreen (WBA -1.12%). Earlier this week, drugstore chain Walgreen announced that it would be joining 17 other companies in moving 120,000 of its employees to Aon Hewitt's privatized corporate health exchange where participants would receive a cash subsidy and select their own insurance from the plans made available to them.

As you might imagine, there has been a decent amount of backlash against these recent moves. Workers and skeptics have denounced the corporate move as another selfish example of cost savings at the expense of the American worker. While I do share in some of these potential question marks, there are also some very intriguing investment opportunities, as well as room for health care quality improvement, with this move.

The move away from group plans generates risks and opportunity
Three companies that are looking like crystal-ball readers at present are WellPoint (ELV 0.52%), CIGNA (CI), and Aetna (AET), which spent through the nose to purchase Amerigroup, Healthspring, and Coventry Health Care since 2011. Although these deals were orchestrated to capture a good chunk of soon-to-be-covered Medicaid members as outlined under the Medicaid expansion, if large corporations continue to move away from group health plans, we could see a large uptick in individual and privatized corporate health plans -- thus providing a pop to all three companies.

On the flip side, though, corporate group health providers could simultaneously see their membership and/or margins shrink. Over the past three years, Walgreen had only allowed its employees the choice between two health plans, offered by WellPoint and UnitedHealth Group (UNH 1.46%), which often carried lofty premiums. With more choices on Aon's corporate health exchange, including the now familiar tiers (bronze, bronze plus, silver, gold, and platinum), employees may have to option of moving toward lower-premium (i.e., lower margin) health plans. Based on Aon Hewitt's data collected thus far according to Reuters, a majority of plan participants (42%) had selected a cheaper plan than in the previous year compared with the 26% that purchased a more expensive plan.  

This presents itself as a double-edged sword in that it could be bad news for large corporate insurers like UnitedHealth and Aetna in that increased transparency may reduce margins and membership. Yet, it's also an opportunity to bundle higher-priced full coverage packages together, which may be able to make up for some, or all, of the lost premium on lower-tier packages.

The addition of Walgreen to the corporate health care privatization trend also doesn't change my opinion that insurers offering Medicare Advantage plans will be big beneficiaries. Although Walgreen's move is all-encompassing in terms of age (it's not just for seniors or retirees), and all employees will now be in control of their own health plan selection, the uncertainty derived from continuing health care subsidies will likely drive individual users in greater number to purchase the supplemental insurance known as Medicare Advantage to fill the gaps of what Medicare doesn't cover. Humana, which derives almost two-thirds of its revenue from Medicare Advantage would therefore be expected to benefit in a big way. 

But, there is still one very big unanswered question
Putting the fact aside that it appears that corporations are attempting to distance themselves from employees when it comes to offering health insurance, and that employees will have greater diversity in health plan choices than they had previously in almost every instance, plenty of unanswered questions remain. Perhaps none is more prevalent, though, than how these corporations will ensure that ongoing contributions keep up with the rate of premium inflation.

In the case of Walgreen, its subsidy next year is expected to match what corresponds to the silver level on Aon's corporate health exchange. But what happens moving forward is the real question. Obviously, health insurance premiums are going to march higher (but hopefully at a slower pace due to Obamacare's health system overhaul) over time. The question would then be: Will corporate subsidies be able to keep pace? And if so, how does this save these companies any money as opposed to offering group plans that can come with favorable rates? I'm not sure anyone really knows the answer to this yet, and it represents one of those unforeseen factors that clouds the real benefit that these insurers could see with the move toward corporate privatization of health care.

Onward we march
Earlier this month, Aon Hewitt estimated that roughly 60% of all businesses either have, or are seriously considering, making changes to their retirees' benefits health plans. Given this high number, it seems pretty obvious that until proven otherwise we're going to see a move by many large corporations away from employee-sponsored group health and toward subsidized private health care.

Clearly, we have some questions left to be answered (and soon we will indeed have some answers!), but I'd suggest that many of the aforementioned insurers stand to benefit in the interim with the employee/retiree in many cases gaining additional plan options that weren't previously available. If I didn't know any better, I might quantify that as a win-win for corporations and employees/retirees, but I'll reserve my judgment until we have conclusive data to work with in perhaps a year's time.