Health insurance companies, now required to spend the lion’s share of premium revenue on patient care, are looking for higher investment returns elsewhere. As a result, they’re increasingly putting money into technology ventures where they expect to realize higher returns.
The medical-loss ratio standard under the Patient Protection and Affordable Care Act requires insurers to spend at least 80% of what they earn from premiums on patient care and related quality improvements. No more than 20% can be used for administrative, marketing and business expenses. The requirement is as high as 85% for large group plans.
Tied to that, insurers are trying to maximize their investment returns while also investing in businesses that are exempt from the 80/20 rule. Technology operations check off both those boxes for them.
“That’s been a catalyst for a substantial amount of investment,” said Joshua Kaye, a Miami-based 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.”
As insurers experiment with new payment models related to population health management, they’re particularly interested in cost transparency tools and data and analytics, he said.
The 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 among other specialties, saw 26% growth in revenue and 61% growth in operating earnings. That helped contribute to UntiedHealth Group’s overall strong performance for the year.
In its core insurance business, UnitedHealth saw its 2013 operating margin decline to 6.4%, down from 7.6% the previous year. But Optum’s operating margin increased to 6.2% from 4.9% in 2012.
On a second-quarter earnings call, Aetna CEO Mark Bertolini said the company remains active in the M&A market, particularly in the international and technology space. And addressing where Aetna is looking, “it’s definitely technology,” he said.
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Jeffrey R. Ungvary President