Fac­ing pre­mium ra­tio rule, in­sur­ers di­ver­sify into tech­nol­ogy

Modern Healthcare - - NEWS - By Beth Kutscher

Health in­sur­ers, now required to spend the ma­jor­ity of their pre­mium rev­enue on pa­tient care, are look­ing for higher profit re­turns in busi­nesses other than health in­sur­ance. As a re­sult, many are in­vest­ing in tech­nol­ogy ven­tures.

The med­i­cal-loss ra­tio stan­dard un­der the Pa­tient Pro­tec­tion and Af­ford­able Care Act re­quires in­sur­ers to spend at least 80% of pre­mium rev­enue on pa­tient care and re­lated qual­ity im­prove­ments. No more than 20% can be used for profit, ad­min­is­tra­tive, mar­ket­ing and busi­ness ex­penses. The per­cent­ages are 85% and 15%, re­spec­tively, for large-group plans.

In re­sponse, in­sur­ers are in­vest­ing in busi­nesses that aren’t gov­erned by that rule, such as in­for­ma­tion tech­nol­ogy op­er­a­tions. “That’s been a cat­a­lyst for a sub­stan­tial amount of in­vest­ment,” said Joshua Kaye, a Mi­amibased part­ner at law firm DLA Piper. “We’re re­ally see­ing it on a na­tional scale. Many in­sur­ers view health IT as be­ing on the cut­ting edge.” In­sur­ers are par­tic­u­larly in­ter­ested in cost trans­parency tools and data and an­a­lyt­ics, he said.

Such new busi­ness lines al­low in­sur­ers to di­ver­sify and strengthen their rev­enue base, said Jonathan Krieger, man­ag­ing direc­tor at in­vest­ment bank Berk­ery Noyes, which fo­cuses on the tech­nol­ogy sec­tor. “There’s a lot of ac­tiv­ity in the space,” he said. “They need to look for other ways to main­tain their mar­gins.”

In 2013, for in­stance, Unit­edHealth Group’s Op­tum di­vi­sion, which works in tech­nol­ogy and pop­u­la­tion-health man­age­ment, saw 26% growth in rev­enue and 61% earn­ings growth. In its core in­sur­ance busi­ness, Unit­edHealth saw its 2013 op­er­at­ing mar­gin de­cline to 6.4% from 7.6% the pre­vi­ous year. But Op­tum’s op­er­at­ing mar­gin in­creased to 6.2% in 2013 from 4.9% in 2012.

On a sec­ond-quar­ter earn­ings call, Aetna CEO Mark Ber­tolini said his com­pany re­mains ac­tive in the merg­ers and ac­qui­si­tions mar­ket, par­tic­u­larly in the in­ter­na­tional and tech­nol­ogy space. Ad­dress­ing Aetna’s future in­vest­ment tar­get, “it’s def­i­nitely tech­nol­ogy,” Ber­tolini said.

Cigna CEO David Cor­dani sim­i­larly pointed to “on­go­ing tech­no­log­i­cal in­vest­ments” as one fo­cus area in the sec­ond half of the year.

In the grow­ing dig­i­tal health sec­tor, two of the most ac­tive ac­quir­ers in 2013 were Sand­box In­dus­tries, a ven­ture cap­i­tal firm backed by Blue­Cross BlueShield Ven­ture Part­ners, and Lemhi In­dus­tries, an­other ven­ture cap­i­tal firm that has Unit­edHealth Group as an in­vestor.

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