Facing premium ratio rule, insurers diversify into technology
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.