The Health Insurance Industry in the United States

Prepared for the Sunrise Project

June 2020



 

Overview

The health insurance sector in the United States is a massive and growing industry that has situated itself as a key intermediary in the provisioning, allocation, pricing, and financing of healthcare for the majority of Americans. Each year, individuals, health insurers, and federal and state governments spend approximately $3.5 trillion on various types of health care, accounting for 16.9% of US GDP. Two-thirds of the people covered by health insurance are covered by private health insurance plans, making the health insurance in the United states a $1.1

trillion industry.[1] The other third of Americans with health insurance are covered by government plans, including Medicare, Medicaid/CHIP, TRICARE and VA Care. 

The US health insurance industry is tightly interrelated with other parts of the healthcare system and many insurers merged with, acquired or been acquired by companies operating in other parts of the healthcare system, including hospital systems and pharmacy benefit management businesses. Health insurance companies sell policies to customers, negotiate rates with healthcare providers, and very often dictate what and how much healthcare patients should receive. 

 

The private health insurance market includes both group plans (largely made up of employer-sponsored insurance) and non-group plans (commonly referred to as the individual market, which includes plans purchased directly from insurers as well as those purchased from exchanges). Roughly 80% of people in the United States with private insurance are part of group plans.

The size of the market for private health insurance in each state is generally tied directly to population, however, local healthcare costs, age, and income distribution all impact state markets. California has the largest market for private insurance with insurers collecting $212 billion in direct premiums in 2018.

[1] Ryan J Rosso, “U.S. Health Care Coverage and Spending,” 2020, 3.

Health Insurance Market Share

The US healthcare industry is moderately consolidated with the largest 10 largest insurers, United Health, Kaiser, Anthem, Humana, CVS/Aetna, HCSC, Centene, Cigna, Wellcare, and Molina Healthcare, holding just over 51% of national market share. Because insurers must register independently in each state where they wish to underwrite policies and negotiate rates with healthcare providers in each geography, there is significant variation in market presence from state to state. Anthem, for instance, is the largest private insurer in Ohio and Virginia but does not offer policies at all in Pennsylvania or Minnesota.

History and Market Structure

The modern health insurance industry started in the 1930’s during the Great Depression the Baylor University Hospital in Dallas recognized that large numbers of local school teachers were defaulting on their hospital bills. This was forcing many teachers into poverty and (more importantly for Baylor) causing the hospital system a significant amount of money in lost revenue. To combat this trend, Baylor began selling pre-paid hospital plans to teachers, allowing them to pay up front for hospital care. This ensured that teachers’ medical bills were covered and provided a steady source of revenue for the hospital system during slow periods.

This model was incredibly popular among both customers and hospitals and it quickly grew across the country. By 1933, community-based plans were established in St Paul, MN; Washington, DC and Essex County, New Jersey. The American Hospital Association (AHA) played a major role in structuring this emerging industry and granted the Blue Cross emblem to hospital benefit plans that adhered to its guidelines. Notably the AHA structured joint plans in a way that reduced competition between hospital systems with subscribers having the ability to obtain care at any licensed local hospital.

 

These early health insurance plans were largely tax-exempt community service organizations, but by the 1950s commercial health insurers began entering the industry, competing with the original Blue Cross community plans. At the time Blue Cross plans set premiums using the community rating principle, which linked premiums to average claims costs across a geographic area. As commercial health insurers entered the market they offered less expensive plans to healthier customers, drawing away the most profitable customer bases from the Blue Cross plans which drove up costs for the remaining customers.[1]

 
The Rise of Managed Care

Health insurance companies in the United States currently play a significant role as intermediaries in key parts of the healthcare industry and financial markets for healthcare. At the most basic level, insurance companies sell policies to customers and commit to cover some or all of the costs of healthcare of the beneficiaries of those policies. If the cost of the healthcare a patient consumes is less than the cost of the premium, the insurer makes a profit; if the cost of the healthcare a patient consumes is more than the cost of the premium, the insurer records a loss. 

 

As health care and insurance costs in the United States sharply rose in the 1970s, insurers implemented Health Maintenance Organizations (HMOs) which integrate health care and health insurance functions to create a financial incentive to keep costs down. The general logic was that if the same company was responsible for both providing care and paying for the care, these HMOs would be more likely to keep costs down by promoting wellness programs and providing less unnecessary care.[2]

While these structures did help keep costs down, they also were seen as a gatekeeper to care, forcing second medical opinions and pre-approval requirements that sparked strong consumer resistance. Over the next several years insurance companies introduced a series of other managed care options including Preferred Provider Organizations (PPOs), Exclusive Provider Organizations (EPOs), and Point of Service Plans (POS) offering a range of provider networks and cost mixes.[3]

[1] D Andrew Austin and Thomas L Hungerford, “The Market Structure of the Health Insurance Industry,” n.d., 67.

[2] Austin and Hungerford.

[3] “Types of Health Insurance | Cigna,” accessed July 3, 2020, https://www.cigna.com/individuals-families/understanding-insurance/types-of-health-insurance.

Methodology and Sources

 

This report was prepared for the Sunrise Project in June and July of 2020. The research request was for an overview of the health insurance industry in the United States with detailed corporate profiles on three specific companies, Anthem, Aetna (and its parent company CVS Health) and Cigna. The introduction and overview of the health insurance industry attempts to offer an explanation of the structure, funding sources, and logic of the United States’ bizarre for-profit health insurance system for campaigners in the US and abroad who are not familiar with health care in the United States. The corporate profiles attempt to introduce the operational and decision making structures as well as the business environments that they are navigating and their own strategic growth plans.

Unless otherwise noted, operational and financial information on each of the three companies comes from the company’s most recent 10-K report, Proxy Statement or website. Aggregate data on market share comes from the 2019 National Association of Insurance Commissioners Annual Market Share Report.

Data on group plans comes from form 5500’s filed with the US Department of Labor by each of the plan sponsors. Because of the ongoing COVID-19 pandemic the Department of Labor has relaxed the timeframe for submitting form 5500s for the 2019 plan year, so all of this data is based on reports submitted in 2019 covering the 2018 plan year. Data on campaign contributions comes from the Federal Elections Commission bulk data file for campaign contributions. Notably the bulk data file does not include party affiliation for recipients other than candidate sponsored committees.

BN-HC496_ANTHEM_P_20150224150357.jpg
Anthem Inc.

220 Virginia Ave.
Indianapolis, IN 46204

Antheminc.com

 

Anthem Inc. is a publicly traded, for profit corporation. Its shares are traded on the New York Stock Exchange under the ticker symbol ANTM.

 

Overview

Anthem is the third largest health benefits company in the United States in terms of membership, with approximately 41 million members covered under affiliated plans. The company is an independent licensee of the Blue Cross and Blue Shield Association (BCBSA). Anthem offers a broad spectrum of network-based managed care plans to large groups, small groups and individuals as well as the Medicaid and Medicare market.

 

The company formed in 2004 when WellPoint Health Networks Inc. and Anthem Inc. merged to form what was then the nation’s largest health benefits company. At the time of the merger, the joint company took the name WellPoint, however in 2014 the company re-branded as Anthem Inc. because that brand held stronger name recognition.

 
Business Segments

Anthem manages its operations through three reportable segments: Commercial & Specialty Business, Government Business, and Other. Both the Commercial & Specialty Business and Government Business segments offer a diversified mix of managed care products including PPOs, HMOs, traditional indemnity benefits and POS plans as well as a variety of hybrid products including CDHPs, hospital only and limited liability health products.

  • The Commercial & Specialty Business segment includes logical group, national accounts, individual and specialty businesses. Different business units in these segments offer fully-insured health products, provide managed care services to self-funded customers.

  • The Government Business segment includes Medicare and Medicaid business, National Government Services, and services for the federal government. Medicare Supplements are sold to Medicare recipients as supplements to the benefits they receive from Medicare.  The company provides Medicaid and other state sponsored services in Arkansas, California, Colorado, Florida, Georgia, Indiana, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New York, South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin, and Washington DC.

  • The ‘other’ segment includes the company’s pharmacy benefit management (PBM) business, IngenioRx and the company’s integrated health service business, DBG, as well as other corporate expenses not allocated in the other two segments.

Brands

Geography

            Although Anthem operates in 30 states around the country, the company’s premium revenues are concentrated in just a handful of states. In 2018, 53.53% of the company’s premium revenues were collected from just six states: Florida, Georgia, Indiana, Ohio, Texas and Virginia.

Employment

At the end of 2019 the Anthem employed 70,600 people nationwide.  The company reports that its workforce is 76% women and 48% ‘ethnically diverse.’ It also reports that 63% of managers are women and 29% are ‘ethnically diverse.’

Customers

Anthem sells health insurance products to state governments (Medicaid services), Medicare recipients (supplement plans), small and large employers, individuals and families. As noted above, the largest portion of Anthem’s revenue comes from government contracts, however, the majority of the company’s profits are generated from commercial sales.  Form 5500 records filed with the IRS show that Anthem sold group plans to 4,715 employers and associations in 2018 covering at least 5.2 million individuals. The largest of those customers include Ford Motor Company, ATH Holdings Company (covering Anthem’s own employees), IBM, ADP Total Source (Human Resources firm) and Capital One. 

Command and Control Structure

            Anthem’s senior leadership team is made up of a slate of senior executives who are industry-insiders with decades of experience at a range of different health insurance companies. CEO Gail Boudreau joined the company in 2017, but she’s worked in the health insurance industry since 1982 when she went to work at Aetna. The company’s Board of Directors includes a mix of well-connected executives from a range of industries, most with long histories with the company. The two large equity holders, BlackRock and the Vanguard Group are massive investment firms that largely trade based on metrics and rarely participate in the day-to-day operations of their portfolio companies.

 

Senior Leadership

 

Gail K. Boudreau -- President and CEO

Bourdeau was named CEO of Anthem Inc. in November of 2017. She has worked in health insurance for her entire professional careers, starting with Aetna in 1982 before leaving to become the president of Blue Cross/Blue Shield of Illinois in 2002. In 2008 she became the Executive Vice President of UnitedHealthcare and was promoted to CEO of the company in 2011. In 2014 Boudreaux stepped down from UnitedHealthcare to start GKB Global Health, a healthcare strategy and business advisory firm where she worked until she was hired by Anthem. 

 

Bourdeau is a director of BCBSA, the National Institute for Health Care Management, and the Health Services Foundation. She is a member of the Dartmouth Board of Trustees and the Business Roundtable.

Boudreaux earned her Bachelor's Degree at Dartmouth College in 1982, where she was a standout athlete on the school’s Basketball and Track and Field Teams. She was Dartmouth’s all-time leading scorer and rebounder and named Ivy League Player of the Year in basketball for three straight seasons. She also won four straight Ivy League women’s shot put titles and earned All American recognition in shot put.[1] Then in 1989, while she was working for Aetna, she earned an MBA from Columbia University. 

 

John E. Gallina--Executive Vice President and Chief Financial Officer

Galina joined Anthem in 1994 as the Chief Financial Officer for the company’s Comprehensive Health Services segment. Over the following 25 years Galina held a number of senior positions in different parts of the company before being named Executive Vice President and Chief Financial Officer. Before joining Anthem, Gallina spent 12 years with Coopers & Lybrand as an Audit Senior Manager.

He received his Bachelor of Science in Business Administration from The Ohio State University. He is currently a member of the Board of Directors of FORUM Credit Union, the National Organization of Life and Health Guarantee Associations, and the Western Golf Association, and is a member of the Advisory Board of Baby Doctor, Inc.[2]

 

Dr. Prakash Patel -- Executive Vice President and President, Diversified Business Group

Dr. Prakash Patel serves as Executive Vice President and President for Anthem, Inc.’s Diversified Business Group. Before joining Anthem, Patel served as Chief Operating Officer of the GuideWell Enterprise and Florida Blue and President of GuideWell Health; Chief Executive Officer of Access Mediquip; and he also held executive roles with Magellan Health Services, Internet Healthcare Group, and Scheer & Company.

Peter Haytaian -- Executive Vice President and President, Commercial and Specialty Business Division

Peter D. Haytaian serves as Executive Vice President and President for Anthem, Inc.’s Commercial and Specialty Business Division. Haytaian previously served as Executive Vice President and President of Anthem’s Government Business Division. He joined Anthem in 2012 as part of the Amerigroup acquisition, serving as President of the Medicaid business. While at Amerigroup, he held a number of senior leadership positions, including CEO of the Medicaid North Region and head of the company’s Medicare Advantage business. Prior to joining Amerigroup, Haytaian served in a variety of leadership roles at Oxford Health Plans Inc., and was a regulatory attorney and lobbyist on healthcare and election law issues at Graham, Curtin & Sheridan PA.

 

Leah Stark -- Executive Vice president and Chief Human Resources Officer

Leah Stark serves as Executive Vice President and Chief Human Resources Officer (CHRO) for Anthem, Inc. Prior to joining Anthem, Stark served as the CHRO for General Cable Corporation, in which she led global Human Resources, Procurement, Communications and Public Relations. She spent a decade at Whirlpool Corporation in global HR leadership positions in both Benton Harbor, Michigan, and Shanghai, China. Additionally, she has served in HR leadership roles with Schneider National and General Mills.

[1] “Industry Leader: Gail Boudreaux,” Minneapolis / St. Paul Business Journal, accessed June 27, 2020, https://www.bizjournals.com/twincities/stories/2009/05/25/focus23.html.

[2] “Event Speaker Bio - FEI,” accessed June 27, 2020, https://www.financialexecutives.org/Events/Event_Speaker_Bio.aspx?Speaker=D46DC120-4960-4F00-937E-182DB28B8D98.

[3] “Special Report: Economy-Class Activist Investor Crashes the Corporate Party,” Reuters, October 23, 2013, https://www.reuters.com/article/us-activist-chevedden-special-report-idUSBRE99M0LE20131023.

[4] “BRIEF-Cigna Says Co No Longer Expects Court To Issue Post-Trial Decision In Anthem-Cigna Litigation Before End Of Feb. 2020 - Reuters,” accessed June 29, 2020, https://www.reuters.com/article/brief-cigna-says-co-no-longer-expects-co/brief-cigna-says-co-no-longer-expects-court-to-issue-post-trial-decision-in-anthem-cigna-litigation-before-end-of-feb-2020-idUSFWN2AJ0I8.