Independence Holding Exec: US Health Reform May ‘Reinvent the Game’ of Insurance

Reform of the U.S. health care system contains some good news for health insurers, but the overhaul of the individual market may pose some problems for smaller carriers in particular, said an executive with Independence Holding Co.

The new law will "reinvent the game" as there will be many changes to the concept of risk and insurance and changes to how people partner with insurers and brokers, said Jeff Smedsrud, senior vice president and chief marketing and strategy officer for Independence Holding (NYSE: IHC). "It's not all bad news; there's some good news in all that."

Some in the industry have speculated that smaller companies, particularly those in the individual market, will be challenged by reform's costs and regulatory requirements. "I think you're going to see some consolidation," Smedsrud said, noting IHC is well-diversified. However, "you will see more consolidation and acquisitions."

Through two subsidiaries, Madison National Life Insurance Co. and Standard Security Life Insurance Company of New York, IHC sells employer medical stop loss insurance, major medical insurance for individuals and families, small group major medical and limited medical insurance through multiple distribution channels.

The industry is entering a challenging period during the next six to nine months as the federal government, the U.S. Department of Health & Human Services, the National Association of Insurance Commissioners and the states "all help us clarify what the rules of the road mean," he said.

Smedsrud also sees the supplemental insurance market as being poised for growth. Some plans won't be governed by some of the rules of reform, such as critical illness, accident and hospital indemnity plans, he said. For the most part, they would be sold outside of the state-based exchanges, where individuals would buy a qualified health plan, Smedsrud said.

"I think some of the plans of the future, quite frankly, haven't even been invented yet."

IHC describes itself as between a "boutique" and "behemoth" company, with about $1.3 billion in assets and $600 million a year in annualized premium, said Smedsrud.

"We have a unique space," he said. "We're not the big, big guys but we're big enough to survive, small enough to be flexible and adapt quickly to change."

The individual market reforms may cause problems, he said, referring to the individual mandate that starts in 2014. It requires individuals buy health insurance or pay a tax penalty.

Starting in 2014, the tax penalty is $95. "It's disturbing that it's a very small penalty," Smedsrud said. "It allows people to basically opt out until they get sick and need coverage." This creates an "anti-selection model," which already occurred in states such as New York and New Jersey, which drives up costs, he said.

Those without insurance would pay a fine based on income or a flat rate, according to the Kaiser Family Foundation, the Congressional Budget Office and the House rules committee. It would be phased in over time -- $95 in 2014, $495 in 2015 and $750 in 2016; or 0.5% of taxable income in 2014, 1% of taxable income in 2015 and 2% of taxable income in 2016.

The "enforcement mechanism" also isn't strong, he said. "If you don't pay federal income tax, there's no way to enforce this," according to Smedsrud. About half the people in the United States don't pay federal income taxes, he said.

Madison National Life Insurance and Standard Security Life Insurance Company of New York each currently have Best's Financial Strength Ratings of A- (Excellent).

To see the entire interview, where Smedsrud also discusses medical loss ratio requirements and reform's impact on agents and brokers, go to: http://www3.ambest.com/ambv/displaycontent/MediaArchive.aspx?RC=171707

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])