For the CFO of a health-insurance company these are heady times indeed. Count the ways.
There’s taking on the risk of participating in the public exchanges created under the Affordable Care Act that are now (if quite shakily) available to consumers. Health insurers are also now forced to make assumptions for purposes of financial planning and forecasts based on massive government programs they’ve never before had to factor in. Another major consideration is staying current in an environment where business is transferring from group health plans to retail plans, a trend that’s likely to not only continue but to accelerate.
Failure to act with foresight and determination could be fatal. “If we stayed on the path that’s been successful for us, we might find ourselves irrelevant in two or three years,” says Ken Avner, finance chief at Health Care Service Corp.
HCSC is the largest “mutual legal reserve” heath insurance company — i.e., a nonprofit insurer owned by its policyholders — in the United States. The company, which operates the Blue Cross Blue Shield businesses in Illinois, Texas, New Mexico, Montana and Oklahoma, says it uses its earnings to support its financial stability, provide members with high service levels and broad medical-provider networks, and temper rate increases.
Avner is now completing his third year as finance chief at HCSC, where he’s worked for 27 years. Until he became CFO he was a career actuary. In the fall of 2010, when he was the firm’s chief actuary, HCSC’s CFO retired and the company decided to merge its finance and actuarial departments, with Avner leading the combined unit.
Avner recently spoke with CFO about the impact of health-care reform, his role and his efforts to make HCSC a less-conservative company. An edited transcript of the discussion follows.
After an actuarial career, were you prepared to take over finance for such a large company?
It’s not like I have no accounting background. One of the requirements for an actuary is that you have a certain amount of insurance-accounting education. Also, I come from a family of CPAs. I did a lot of hanging around with accountants growing up. And I have an excellent accounting staff.
Our CEO felt we weren’t taking advantage of some synergies that we could have, and also that because we’re entering a chaotic couple of years with the Affordable Care Act, it would be useful to get finance and actuarial more closely integrated.
In general, why does it make sense to have an actuary be CFO of an insurance carrier?
Actuaries are used to dealing with uncertainty, modeling alternatives and communicating a financial story with alternatives. In this time of chaos, especially because we are not a publicly held company, understanding the various alternatives our company faces is paramount.
Actuaries are the engineers of the insurance business. What should the product look like, how should we build it, how do we make sure it stays modern? Actuaries have a different view of what the insurance business is than, say, somebody who comes from the accounting side.
How would you describe the “chaos” you referred to?
The ACA completely changes the way we’re looking at our business. We, like the health insurance industry generally, were already moving toward more retail business because of the private exchanges. It was clear 10 years ago that changes were coming. But clearly, the ACA put change on a particular path, and the public exchanges have accelerated the change much faster than would otherwise have been the case.
On top of that, we have to deal with the so-called three R’s — the ACA’s reinsurance program, risk-adjustment program and risk corridor, all designed to mitigate health-insurance carriers’ risk. Without them, the drain on the market [from taking on millions of previously uninsured people with chronic conditions, as they must do starting in 2014] would be so bad that no carriers would have participated in the public exchanges.
It means that our financials, even for 2014, will be filled with a lot of estimates of numbers that nobody has had to estimate in the past. I’m talking about hundreds of millions of dollars recovered through the reinsurance program alone. Nobody has run anything like that program before, the rules aren’t completely written, and it’s going to be an estimate as to how big those receivables are.
Do you have projections for how many healthy people will buy insurance for the first time because of the individual mandate?
We do. Not only how many will buy, but who: people from high-risk pools, people coming out of group insurance, individuals, people from Medicaid. You might guess that we have very complicated models for this. And we do — but they’re all based on significant assumptions.
Are you comfortable about being in the public exchanges yourself?
We made a decision to go all in on the exchanges very early on. It’s interesting — I remember hearing the CEO of Aetna say during a Wall Street session that “if this is a land grab, we’re sitting it out.” And it turns out that Aetna is participating in a big way through its acquisition of Coventry.
We had to revamp our whole retail model, even though we had a very large and successful one, to take on millions of new members who we were not otherwise going to get. I’m assuming the government will eventually get its exchange act together.
We’re making a lot of changes. Three or four years ago we decided to enter the government market, meaning Medicare and Medicaid management, in a much bigger way. Before that we hadn’t been a Medicaid player at all and had just dabbled a little in Medicare. We’re now a Medicaid contract holder in Texas and also in New Mexico, which has a high percentage of Medicaid enrollees. We were just accepted as a managed Medicaid player in Illinois, and two years ago we started a Medicare Advantage program that’s growing.
Getting into a business where we don’t have a long history of success is a challenge. We had people saying, “Why are we doing this? Why don’t we just continue operating along the path that’s been successful for us?” So as a management group we had to show them what the future was probably going to look like.
What else are you doing to prepare for the future?
We’ve historically had a pretty conservative investment portfolio. Actually it was incredibly conservative. That was probably appropriate for an insurance company, because it’s a risky business to begin with. And there is also a fair amount of regulation that forces us to be relatively conservative.
But there are a lot of small but good ideas, in some cases disruptive ideas, that are looking for funding. My position now is that as we enter what I see as a very uncertain future, it’s less risky for us to get involved in some of them than to just sit here in a big castle saying that those shots will never get over our walls.
We had made an investment from our venture capital fund in [private-exchange player] Bloom Health, but it was something we thought we should get involved with. So we, along with Michigan Wellpoint, bought it out from the owners. I’m on the board. We’ve used that to help us understand the move to private exchanges. It’s a good example of trying to get an understanding of getting involved with smaller companies that may be disrupters.