Why Health Insurers May Be Destined to Follow Blockbuster Into Irrelevance

05/04/2015 01:38 pm ET | Updated May 04, 2016

Remember Blockbuster?

In its heyday -- which wasn't so long ago -- Blockbuster had 60,000 employees and 9,000 locations. For most Americans, for a minute anyway, it was the place to rent a movie. Then along came Netflix. And Redbox, which operates most of the movie-rental kiosks in convenience and grocery stores.

Before you knew it, Blockbuster was no longer a necessity. All of a sudden, it seemed, we could get the video entertainment we wanted faster and cheaper and, at least with Netflix, without having to leave the comfort of our homes. In 2010, Blockbuster filed for bankruptcy, just 25 years after it was founded. By last year, the last of those 9,000 stores had closed.

What will be the next Blockbuster? It very well might be your health insurance company, says Steven Brill, the entrepreneur and journalist whose 26,000-word Time magazine cover story about the absurdly high costs of American health care captured the nation's attention two years ago.

"I see insurance companies as the weak players" in the U.S. health care system, Brill told me in a recent interview. By that he meant that insurers have become increasingly impotent middlemen in the battle to rein in health care costs.

He was quoting Ezekiel (Zeke) Emanuel, former health policy advisor in the Obama administration who is now a vice provost at the University of Pennsylvania.

Brill explained that what Emanuel meant "was that just as the video rental giant got overtaken by upheavals in how media is delivered, large insurers such as Aetna are going to be overtaken by changes in the structure and delivery of health care."

As Brill notes, many of those changes were set in motion by the Affordable Care Act, which is making it necessary for doctors, hospitals and other health care providers to work together more collaboratively. Increasingly, Medicare and other payers are reimbursing health care providers based on how well they care for us rather than on how many separate, billable things they do to us.

As a consequence, hospitals are having to operate more efficiently, which is leading to a consolidation in the industry. There were 95 mergers just last year alone. That's 44 percent more than in 2010, the year Congress passed health care reform.

The pace of consolidation among hospitals actually began to pick up in the years leading up to Obamacare. Hospitals started merging partly in response to rapid consolidation among health insurers. In 1985, the year Blockbuster was founded and the year I started my career in health care at a hospital in Tennessee, few people, including me, had ever heard of UnitedHealth. Today, as a result of a long string of acquisitions, UnitedHealth Group is the nation's largest insurer and, according to Fortune, the 14th largest U.S. company of any kind.

Aetna, Cigna, Humana and Anthem, the other big insurers, also bulked up through acquisitions. As they got bigger, they had more leverage with hospitals during annual negotiations that determined how much insurers would pay for medical services.

In self-defense, hospitals began to get bigger themselves. As a consequence, even UnitedHealth is now often forced to pay whatever the big hospital systems demand.

Not only have hospitals in many cases regained the upper hand during reimbursement negotiations, a growing number of them have started operating their own health plans.

"I think it's inevitable that most hospitals and hospital-based health care system will be selling their own insurance," Brill told me.

I agree. It's a "back to the future" phenomenon. The forerunner of today's Blue Cross companies started out as an insurance plan developed by Baylor Hospital in Dallas. And the hospital I worked for in Tennessee back in the '80s had its own HMO for a while. Many hospitals did. Most of them failed, however, because hospital executives didn't know as much as they thought they did about running an insurance company. The hospitals that are getting back into the insurance business today seem confident they won't repeat the mistakes of 30 years ago.

Consolidation among hospitals is creating oligopolies in many markets, but Brill doesn't believe that's necessarily bad, nor is he reflexively against hospitals becoming insurers. The disappearance of insurance companies--at least as we know them today--doesn't worry him. For one thing, today's health insurance company as middleman adds billions of dollars in administrative costs to the system that, theoretically, would go away when Aetna and the other firms go the way of Blockbuster.

The question becomes, 'How well will these oligopolies be regulated?'" Brill says. "How will I know, for example, that they won't skimp on my care?"

Hospitals will have to be regulated in ways they haven't been regulated before, he says. There will need to be standard-of-care regulations. And limits on profit margins.

Brill believes that if those and other regulations can be put in place, quality of care will go up and costs will come down. If they aren't, however, we may be worse off than we are now.

This post was published initially by the Center for Public Integrity. You can find more about Wendell Potter here.