As we discussed yesterday, the provider side of the equation for health care is consolidating. Depending on how one wishes to analyze the payer side of the equation, one can strongly and correctly state that there is a massive fracturing of insurance market share and price making power. One can also say that there will soon be a massive consolidation of payer power.
Both are all true if you slant your view.
The slant is the key of a potential major problem. The consolidation argument is simple. Right now in the non-group market there are a few hundred licensed, regulated organizations that are sufficiently large to bear population risk and then twenty to twenty five million families with roughly 50 million individuals that are not covered by either government programs or the group insurance market. Once the combination of Medicaid expansion and the Exchanges go live, there will be several dozen more large, licensed, and regulated organizations added to the current list of incumbent payers and ten to twenty million fewer people running naked without insurance.
This view has truth in that the ten to twenty million people who are no longer running naked will now be facing billable rates that are both negotiated in advanced and more importantly based on standard Medicare rates plus a kicker or standard group commercial rates. Previously, they were facing rates that were charge master minus a percentage after engaging in long, ugly, protracted negotiations.
The other slant is that there are a signifcant number of new entries into the health insurance and medical care payer marketplace. There are three major sources and one minor source of new entrants. The first is a set of twenty two health insurance co-ops that are federally backed and will be going live for the first time in two weeks:
In Maine, for example, co-op Maine Community Health Options is one of just two plans selling on the marketplace. Without it, the only option would be Anthem Blue Cross Maine.
“Are rates are lower in almost every product offering,” Maine Community Health Options executive Kevin Lewis says.
New Mexico’s co-op believes its presence has lead to lower rates for other health plans. Executive Martin Hickey says that, after competitors saw his plan’s rates, they ultimately lowered the prices that they would charge consumers in subsequent filings with the New Mexico Public Regulation Commission. “We started off as the lowest,” Hickey says, “And some others dropped their rates by as much as 30 percent.”
These co-ops are betting that they can run a very low overhead, Exchange focused business model where the goal is active pre-medical management of medical conditions. I would bet that at least a few of these co-ops will succeed in providing good services at reasonable prices to lots of people. I would also bet that there will be a few failures, and quite a few that are adequate but nothing special. As a final bet, I think at least a few of these co-ops will use the Health Quality Partners model of actually talking to people face to face as a high value added tool. The big risk of these plans is that they are initially small and they don’t have detailed data for model building. I would be shocked if none of them don’t experience significant first year losses that are solely due to massively misjudging the risk pool that buys their product.
The next major source of new insurers are incumbent insurers who are expanding product lines to cover individuals for the first time or expanding geography or both. Obamacare made the rules of offering products on the Exchanges fairly clear and straightforward once a plan is approved at the state level as a “qualifying health plan”. The regulatory burden of filing for a new product or a new area to sell into is fairly light. The reasonably low costs of regulation plus the promise that there are millions of customers who will have federal dollars attached to them have made insurance companies who have already offered government health insurance (Medicare Advantage, CHIP, Medicaid managed care etc) or group insurance (what our employers offer) be willing to expand into the individual market. Some of the major national players have not expanded as much as the Administration probably hoped, but there are new players offering new products in new areas.
The third group is related more to the group market but it will have some long term impact. There are a number of hospital groups that are transitioning from being only hospitals and service providers to being integrated health care provider payers. There have always been a few of these organizational structures in this country. Kaiser is the biggest and most notable. As I mentioned previously, providers are both consolidating and being forced to take on more population management risk. The biggest providers in the ACO model are effectively being told to manage statistical risk and that is an insurance company’s core competency, so providers are becoming insurance companies too. The provider chain near me that is doing this conversion is only offering government and commercial group insurance this year, but they could expand. The basic bet is that they can save on money by narrowing networks significantly.
The final set of new providers are minor and small. As far as I know there is a single new insurance company in New York that is looking to disaggregate and disintermediate the entire health care experience by bringing in synergestic, synthetic thinking that drives disruption across multiple paradigms or some other such buzz word bingo winner. If it works, great, but I don’t think there are too many legacy costs or embedded inefficiencies that a new payer can avoid.
Depending on how one defines the market space, the payer market with the introduction of Co-ops, expansions of current insurer’s service areas and product offerings, conversion of providers to provider-payers and new entries could become even more fragmented. If this is how the market is analyzed in the real world, providers will see a significant increase in comparative leverage as they can play payers off each other. However, if one includes the tens of millions of people who are negoatiating for themselves in the current GINI summation, and move those millions into only one or two hundred buckets, payer concentration will also increase despite the new groups entering markets. If that is the case, providers will be played against each other to offer better prices.
Ash Can
I cringe at the thought of the unhinged rhetoric and apoplexy-on-cue that would emanate from the right wing in this case. I hope it doesn’t engender any appreciable practical backlash, such as doing away with the exchanges before they’ve even had a chance to work.
raven
Mornin Joe would like you to reduce this, and all your other posts, to a bumper sticker.
mistermix
Richard, how is failure of a co-op or other insurer handled by the ACA? If I sign up for a year of coverage from a co-op and they go under in the 10th month of the year, is there some re-insurer that guarantees my coverage?
Thanks for yet another great post, btw.
Kylroy
@Ash Can: I work for a company that provides a Medicare Part D Plan, and we saw the same thing happen when it went live in 2006 – every company lowballed its premiums hoping to get customers, then spent the next two years raising premiums to a sustainable level. I expect to see something similar on the exchanges.
karen
I’m sorry it’s OT but it’s very important, especially if you have people who work near the Washington Navy Yard: There was a shooting at the Washington Navy Yard
If you work near that area in Southeast DC, you might want to look at the news.
Richard Mayhew
@mistermix: Insurance companies are required to have very large cash or near cash reserves. Those reserves are supposed to be sufficient to pay out all claims for all contracts going forward if a company shuts down today. The claim profile that is used to measure “adequate” reserve assumes a very low probability and high cost profile. So if you’re in Co-op XYZ and it is losing money by September 2014, its reserves (borrowed from the Feds) will pay claims even if it shuts down operations and does not write any new policies after 9/1/14.
nastybrutishntall
“Are rates are lower”… Is our print medias learning?
? Martin
Agreed. The states were the driving force for consolidation. Because insurance is regulated at the state level, the regulatory hurdle for each state was significant. The primary mode was to target a single state, perhaps a single demographic within that state, and grow until you got monopoly status. The up-front costs to design and test policies within that market, plus the cost of building a network of providers is huge, but the marginal cost of adding people to your policies is pretty low. So a limited market with high penetration is what you want.
So once every state hit this point, the cost of entering a neighboring state was massive. Not only were you paying the up-front costs again, you were doing it against an established monopoly. Consolidation was the only realistic path to expansion.
ACA changes this by establishing a national baseline to work against, and both providing incentives to startups and creating new markets for startups to work in that aren’t dominated by existing players.
This Iowa co-op is illustrative. Cliff is a family friend, and he co-founded the startup with a former Iowa insurance commissioner. He was an executive with the monopoly insurer in the state, so the two of them are fully aware of what they’re up against. But ACA provided enough incentives, and he knows well enough the markets that Wellmark doesn’t want to deal with to make a go at this. He’ll have the exchanges mostly to himself for a year, and his target market are the rural farmers (and doctors) in the state that aren’t sufficiently ‘efficient’ for the big insurer to serve well, and which is a population that is very familiar and comfortable with co-ops. His co-op will also cover Nebraska for similar reasons – same kind of market, same kind of opportunities.
He never would have considered doing this without the exchanges. He was also a recipient of the co-op loans.
@mistermix: Part of the reason for the loans to the co-ops is that, as Richard notes above, they need to have a large reserve. So starting an insurance pool is a challenging proposition – have enough capital to back your first customers before you collect any premiums. And in order to get people to sign up, you need to have designed and tested policies, provider networks, and all that. It’s a large risk to take on. Having the government putting that capital up is really beneficial.
Fred Fnord
Was this Washington Post article written by automated software, or by dictation, or by someone who doesn’t know what homophones are?
“Are rates are lower in almost every product offering?” Really? Not ‘Our rates’?
“New Mexico’s co-op believes its presence has lead to lower rates for other health plans.” Really? Not ‘led to?’
Wow, ‘there’ standards ‘they’re’ are really dropping, aren’t they?
Mnemosyne
@Fred Fnord:
This is what happens when upper management decides that spellcheck can take the place of copy editors.
JoyfulA
I was an individual policy owner for many years, and my husband is one now. He’s very eager to see the new policies.