Having run two health insurance plans—Physicians Health Services Inc., which he founded, and ConnectiCare, where he is still involved as “a senior statesman”—Mickey Herbert has spent most of his life immersed in the delivery of healthcare. He sits on the board of directors of America’s Health Insurance Plans, a trade association representing 1,300 companies that provide health insurance coverage to more than 200 million Americans. Financial & Insurance Meetings Features Editor Alison Hall spoke with him about the Healthcare Reform law, his history, and the insurance industry’s future.

Financial & Insurance Meetings: Your interest in reforming the country’s healthcare delivery goes back to the 1970s.
Mickey Herbert: When I took my first job, post-graduation, it was for the nonprofit arm of a New York consulting firm, where I worked with anti-poverty agencies in Virginia and Kentucky, and with the NYC Welfare Department. After two years, I was enticed to go to Minnesota to work for a charismatic pediatric neurologist named Paul Ellwood, who was influential in convincing the Nixon Administration and a Democratic Congress led by Wilbur Mills and Ted Kennedy to promote a bi-partisan, market-based approach to healthcare reform. That culminated, on the last day of 1973, in the passage of the federal HMO Act, which promoted the startup, development, and growth of hundreds of new health plans. In 1976, at age 32, I began pursuit of a dream to create a health plan that would help reshape healthcare delivery in America. I ran that health plan, Physicians Health Services, for the next 22 years.

FIM: Subsequently you sold the company and later moved on to lead ConnectiCare, working on the cause of healthcare reform in Connecticut in the process. For the past 18 months, you’ve focused on national healthcare reform. Now that the Patient Protection and Affordable Care Act has cleared its hurdles, what are your thoughts?
Herbert: The biggest issue going forward is that we now have this big, complex bill having become law—a 2,400-page bill that will turn the healthcare industry, and the health insurance industry, on its ear. A lot of details are yet to be worked out. The health insurance industry is, thus, entering a regulatory phase that will be challenging to say the least. Implementing the law will be a daunting task facing us over the next several years. And, of course, we need to figure out what opportunities this will create for the industry going forward—to make lemonade out of what is now a pretty huge lemon.

FIM: Insurance meeting planners will be busy planning management conferences and informational meetings as the industry tries to digest this.
Herbert: There will be more meetings, and they should continue for years. Pieces of this bill kick in over the next 10-year period. Each year, there will be new aspects of it that everyone will need to learn about. There will be a huge need for education and communication. Our trade association, America’s Health Insurance Plans, has said it will be presenting many webinars about the bill.

FIM: What will be the effect of healthcare reform on sales strategies? Isn’t it a positive thing for health insurers to be guaranteed so many millions of additional customers?
Herbert: There will be a lot of adjustment in health-insurance companies. They will need new and better products to serve in the new environment. The reform bill will also antiquate some current products.

We should indeed end up with a lot more insureds. But, and this may be a strange way of saying it, it’s not clear if they will be profitable. Many people who don’t have insurance now have significant healthcare needs. In the bill, by 2014, there will be penalties for those who do not choose to buy health insurance. The intent is to create an individual mandate or what we call a personal responsibility requirement. If insurers are going to remove pre-existing conditions, you must compel young and healthy people to get into the [insurance] pool. The problem is that the penalty for staying out is fairly modest. If you are healthy 20-year-old, you’ll probably just pay the penalty and stay out of the pool.

Exacerbating that is something that has been underreported in my view: Insurers are not going to be able to use their ‘rating bands’ anymore. For example, in Connecticut, we are allowed to charge people in the 50- to 55-year age bracket a higher premium than we charge to 20-year-olds. The ratio is allowed to be 5-to-1. But the healthcare reform bill says it can’t be greater than 3-to-1. If we have to make it 3-to-1, younger people will get hit with higher premiums, so they will have even more motivation to pay the penalty and stay out of the pool. Therefore, although the president is saying premiums are going to come down, I’m convinced that the opposite is going to happen.

FIM: Do you see a change in distribution channels for health insurance as a result of the bill’s passage?
Herbert: Yes. When all of the state exchanges come online [by 2013], what may ultimately evolve is less reliance on brokers and more on online portals or kiosks in shopping malls. It’s a little hard to ‘crystal ball’ that. Brokers have been integral throughout our history. But it may well be that insurance brokers working on commission end up going the way of the travel agent. The need for a broker may diminish significantly. We pay a lot of money to brokers to market our products. If all the products are going to be pretty highly regulated, I’m not sure what the ongoing need for the broker is. Twenty years ago, we couldn’t imagine how we could do without a travel agent. Now that’s a dead industry.

FIM: Should meeting planners get ready for a period of mergers as a result of the law’s implementation?
Herbert: We will see more merger and acquisition activity in the health plan marketplace. One reason is that this bill is so big with so much in the way of regulation and compliance requirements that smaller, regional health plans in America won’t be able to comply. But health plans don’t go out of business. What happens is that the state oversees a very careful process of the health plan being taken over by another plan. Or outright acquired. I think that’s unfortunate for two reasons. I’ve run two smaller health plans. You can provide better value-added services to customers when you are smaller. That will be lost. And ultimately you will reduce competition. And I think that goes against the intent of Healthcare Reform. It was never meant to reduce competition.

FIM: One criticism of the bill is that it doesn’t address rising healthcare costs. What is your view?
Herbert: Whatever benefits come from the healthcare reform bill, it’s too expensive. There are a lot of pilot programs in the bill [designed to address the cost of care]. For example, the bill includes a new way of paying doctors and hospitals called bundling rather than fee-for-service. Fee-for-service is one reason for spiraling healthcare costs. Say you have diabetes and the health insurer gives your doctor a flat fee monthly to treat you. His incentive now is to help you get better. But the inclusions like this are so small, I don’t believe they represent a real effort to manage costs.

FIM: What is the focus of your trade association, America’s Health Insurance Plans, in the aftermath of the bill’s passage?
Herbert: One of the big concerns is that since last summer the Administration has chosen to vilify the insurance industry. It’s been damaging and, in my view, unfair. Even in the best of times our profit levels are 5 to 6 percent. In a recession, they are much less.

The insurance industry also has been put in a position where we look as if we are resisting change. But we said in 2006 that we wanted to see all Americans covered. We said we would give up pre-existing conditions. But we want to do it in the right way.

So the association has been working on how to deal with that. The way is not to go negative, but to push out our value story. I’ve been blessed to work with highly rated health plans providing good, value-added services. We expect the industry to put a better foot forward in explaining what we do. And we will need a huge increase in transparency when premiums go up in order to explain precisely why they need to go up. For example, many newly insured individuals will enroll in an expanded Medicaid program, which in Connecticut underpays doctors and hospitals. When that happens, the doctors and hospitals end up charging private health plans more to offset the underpayments they receive from the government. A lot of people think we raise premiums so that we can direct that increased revenue to executive compensation or to our stockholders.

Insurers have to tell their story better. It’s basic to their survival. We’re a resilient industry, but the healthcare reform law will be our biggest challenge ever.