Forget Amazon, GM's Move Should Worry Health Insurers

(Bloomberg Opinion) -- Health-care sector stalwarts may be right in thinking that the joint venture between Amazon.com Inc., JP Morgan Chase & Co. and Berkshire Hathaway Inc. poses no near-term existential threat. It will likely be years before the initiative develops the potential to have a meaningful impact on the industry’s behemoths, particularly insurers. 

But things are happening elsewhere in the meantime. Employers clearly aren’t satisfied with the status quo, and they aren’t waiting for permission to try something new. 

The Wall Street Journal reported Monday that General Motors Co. directly negotiated a deal with Henry Ford Health System to offer a cheaper health-insurance option to a subset of Detroit-area employees. It’s following in the footsteps of several other large and prominent employers that have struck deals directly with providers, without an insurer intermediary. 

A majority of Americans get health insurance through their employers. It’s a particularly important business for some of the country’s largest insurers, most notably Anthem Inc., Cigna Corp., and UnitedHealth Group Inc.

Some employers already take on the risk of paying for employee health care, and just pay insurers for more limited administrative services. But GM and other firms like Boeing and Walt Disney Co. are engaging in an additional radical departure by cutting insurers out from one their most core functions, negotiating and contracting with providers. 

It helps them save money by eliminating a middleman. Plus, they get a greater degree of control and flexibility in how they manage health-care costs. Henry Ford,  for instance, agreed to a number of goals related to quality and cost as part of its GM contract, and can get extra payments if it exceeds them. 

GM and its peers are clearly unhappy with the rising cost of insurance . Employees aren’t enjoying it either. Average annual premiums for employer-sponsored family health coverage reached $18,764 last year according to the Kaiser Family Foundation. And in many cases, there’s less bang for those bucks. More and more companies have migrated to high-deductible plans, which reduces costs but creates significant financial toxicity for employees. 

Direct contracting allows large companies to offer a cheaper option that doesn’t have to rely on massive deductibles. GM says its plan will save employees $300 to $900 a year relative to the cheapest traditional plan, according to the Journal’s report. The trade-off is accepting less choice — employees who pick this option will largely be limited to providers connected to Henry Ford — but that’s arguably preferable to thousands of dollars of additional annual spending on premiums or medical costs. 

This is still very much a nascent trend, and one that has some clear limits. It requires a significant employee presence in a concentrated area in order to work. And insurers have a lot more experience in negotiating contracts with providers and keeping costs down, so there are bound to be bumps in the road. 

But early adopters have reported cost savings, and more companies plan to emulate them. Some 11 percent of companies queried in a recent survey of large employers by the National Business Group on Health said they plan some kind of direct contracting in 2019. 

So far, what we’re seeing is just a trickle of corporate defections away from health-care business as usual. But if, as seems likely, this movement builds into more of a steady stream, the industry may start hurting long before Amazon becomes a threat. 

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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