Assurant prepares for health care reform [Milwaukee Journal Sentinel]

June 17--The world changed spectacularly for Assurant Health in March 2010 when Congress passed the Affordable Care Act.

For the past two years, the Milwaukee health insurer, a company with $1.8 billion in revenue last year, has been reacting to the changes and preparing for changes yet to come.

"It has been an exhilarating couple of years," said Adam Lamnin, president and chief executive of Assurant Health.

At the same time, as the company has been remaking its business, it has had no way of knowing whether the law will survive the legal and political challenges. And the U.S. Supreme Court ruling expected this month may only add to the uncertainty.

It's a management challenge few would envy.

"Health care reform," Lamnin said, "was a watershed event for us."

The two insurance markets most affected by the Affordable Care Act -- those for individuals and small businesses -- are Assurant Health's core business.

The law has forced the company to cut expenses, including eliminating about 200 jobs, and has cut into profits. Yet, the biggest challenges won't hit until 2014, when the law's major provisions go into effect.

Even so, Assurant Health is doing well in all categories of its business, Lamnin said, and he is encouraged by the initial success of its new product line of health plans that offer limited benefits.

"We really have been able to execute somewhat flawlessly in these uncertain times," said Lamnin, who became chief executive in January 2011.

The company, which employs about 1,400 people in Milwaukee and 2,000 companywide, has long ties to Milwaukee, going back to 1900 when the La Crosse Mutual Aid Association moved to the city and changed its name to Time Insurance Co.

The company is part of Assurant Inc., based in New York. The parent company, which had revenue of $8.3 billion last year, sells specialized insurance products, including warranties and service contracts, funeral insurance, homeowners insurance for manufactured housing and so-called lender-placed homeowners insurance, a highly profitable business that has come under scrutiny from regulators in New York and California.

Costs of reform

One immediate change from the Affordable Care Act was to make Assurant Health's main business less profitable.

The company's net income fell by 24%, or $13.1 million, to $40.9 million last year. It would have been up sharply were it not for the new federal requirement that health insurers spend at least 80% of premiums on medical claims and quality initiatives or give rebates to customers.

Assurant Health set aside $41.6 million -- $27 million after tax -- for the rebates last year.

That's just one of the changes from health care reform. More are still to come, including:

The law requires health insurers to cover people with pre-existing health conditions, undercutting Assurant Health's strength in selecting customers who are the least risky to insure.

The law eliminates annual and lifetime caps on benefits and requires health insurers to provide a package of basic benefits, potentially limiting the company's ability to offer less-costly health plans.

The law sets up online marketplaces, known as exchanges, where individuals and small businesses can buy insurance. Depending on how they are designed by states or the federal government, the exchanges could make it easier for people to compare plans, potentially increasing competition and reducing profits.

Assurant Inc., the parent company, has said it believes it can earn adequate profits in health insurance over the long-term.

But in the fourth quarter of 2010, it wrote off the $204.3 million in goodwill on its books for Assurant Health because of federal health care reform and other factors. Goodwill is an accounting entry for the intangible value of a business as an ongoing concern.

Ability to compete

Whether Assurant Health will be able to compete on the exchanges, particularly against much larger companies, is unclear, wrote Mark Finkelstein, an analyst with Evercore Partners, in a December report.

Assurant Health's main market is selling insurance to individuals and their families who do not get health benefits through an employer. Its plans covered 603,000 people as of March 31.

It covered an additional 119,000 people through health plans sold to small employers, with its average customer employing about five people.

Both groups -- individuals and the smallest employers -- are the most likely to buy health plans on the exchanges if health care reform moves forward. Assurant Health also has a reputation for being aggressive in denying claims. It has come under fire from insurance regulators in several states and lost two high-profile lawsuits in recent years for improperly rescinding policies when faced with large bills.

In one of the lawsuits, a customer in South Carolina who had tested positive for HIV was awarded $10 million. In another, a mother of four in Colorado who was severely injured in a hit-and-run accident was awarded $37 million, which was later reduced in a settlement to an estimated $10 million.

In his December report, Finkelstein speculated that if Assurant Health's strategy doesn't work, the parent company would shut down the business and put its capital to work elsewhere.

Limited benefit policy

For now, that seems unlikely. Assurant Health has reduced expenses by tens of millions of dollars. It has reached an agreement with Aetna Signature Administrators to use its network of hospitals and doctors, giving it better negotiated rates. And it has introduced a new product -- Health Access -- aimed at people who don't see the value in buying a health plan with a large deductible.

The Health Access plans have no deductible but typically pay only part of the total bill. The amounts vary with the plan. The least expensive plan pays $50 for an office visit, for example, and $1,000 a day for hospital care.

"This isn't a major medical, but it is a plan that clearly meets consumer needs," said Scott Krienke, senior vice president of marketing and product lines.

The Health Access plans, which are about half the cost of traditional health plans, blur the distinction between being insured and uninsured. They also turn insurance on its head.

"The whole purpose of insurance is to protect yourself from catastrophic costs," said Jerilyn Lucas, owner of Benefit Directions Inc., an insurance broker. "And those limited benefit policies don't do that."

Assurant Health hasn't disclosed sales, but it has told Wall Street analysts that the Health Access products should account for 30% to 40% of its revenue in the individual market in four years.

Awaiting court ruling

That projection could hinge on whether the mandate that everyone have basic insurance or pay a penalty under federal health care reform gets past the Supreme Court.

The Health Access plans won't meet the requirements for basic coverage under the law.

If health care reform survives in its current form, Assurant is betting that people will opt to pay a penalty and buy a health plan with limited benefits instead of buying a traditional policy.

That would include people under 30 -- the biggest potential market for the Health Access plans -- who would have the option of buying low-cost, high-deductible plans without paying a penalty under the federal law.

Assurant Health also is betting that some people eligible for subsidized coverage -- those with incomes up to $45,000 who don't get affordable health benefits through an employer -- would forgo the subsidy and pay a penalty to buy a health plan with limited benefits.

But all that hinges on the Supreme Court not overturning all or part of the law and the law not being repealed by a new administration.

The Health Access plans could be a shrewd hedge that won't happen.

It would give Assurant Health a jump on a promising market. The cost of health insurance is projected to continue to rise, and with each passing year, the potential market for the Health Access plans would get bigger.

"We've looked at the affordability crisis in this country and thought there was an opportunity to help a lot of folks," Lamnin said.

That opportunity could be much larger after early November. And by then, Assurant Health could be looking at a much less uncertain -- and a much more profitable -- future.

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