Where I live, there are six health insurance entities offering Silver plans on the Exchange. They can be divided into two groups. The first group contains local, regional and national players who all have a history of offering large network commercial products. Their Silver products are split between general networks and narrow networks that usually contain 50% to 60% of the general network’s providers. The narrow networks all contain the regional high end specialty hospitals. If I had to buy insurance from the Exchange for my family, I would expect to pay $650 to $700 per month for a narrow Silver before subsidy.
And then there is a single insurer in the second group. It has a long history in the region selling large network commercial products. If I had to buy their narrow Silver Exchange product, I would be looking at $447 or $463 a month as they offer two slightly different flavors of narrow Silver. The second narrow Silver plan sets the subsidy rate in the market. Their broad Silver price point is within a couple bucks of everyone else’s broad Silver.
$100 of the differential can be explained by the super-narrow network that is being offered. None of the regional specialty hospitals are in the network, most of the central city hospitals are out of the network, and the individual providers are extremely thin as well. Reimbursement rates are similar to everyone else’s. The remaining one hundred dollars in differential looks odd to me. This non-obvious price differential suggests the possibility of a loss-leader strategy
There is a possiblely benign explanations that could explain this $100 differential. Actuaries are actually a lot of fun after work, but they tend to be the most staid people alive during business hours. Company X’s actuaries decided to go wild and crazy in projecting the population risk that would be attracted to such a narrow network. They could be projecting that such a narrow network would appeal to very young and very healthy individuals while sicker and older individuals on average would want the more comprehensive networks that are being offered. Older and sicker people would enroll in the first group’s products. There is a flaw with this model.
The plan has two potential outcomes for Company X. The first would be a soft adverse selection where Company X gets most of the young/healthy people and everyone else gets the old and the sick. Since Company X has a much healthier risk pool, the Feds would make Company X pay into the risk adjustment pool. The other scenario is slightly sneakier. Company X has set the subsidy rate with their second flavor of narrow Silver. If we project that most potential Exchange buyers are very sensitive to post-subsidy prices, Company X has a massive advantage in out of pocket monthly premium pricing over all of their competitors. This would draw in a broadly representative risk pool that might be weighted to be poorer than the average Exchange risk pool.
Medical costs may exceed first year premium income and that would be fine as the appararent costs are more than actual costs. This is because there is a risk corridor mechanism. The Robert Woods Johnson Foundation has a nice piece on the risk transfer mechanisms of PPACA:
HHS will provide pro-rata, plan specific payments or assessments if QHP results are more than 3 percent different than target. From 3 percent to 8 percent, HHS will assume 50 percent of favorable or unfavorable results and above 8 percent, HHS will assume 80 percent of favorable or unfavorable results.
The risk corridor program is intended to limit initial losses in the scenario of an actuarial oops.
If an MBA looks at this program and gets devious, they see a way to get their long term marketing costs subsidized as there is a key insight in branding and product loyalty — people are sticky. If a company offers a renewable contract product that is reasonably decent and decently priced, it takes a lot for most people to move off of their initial decision. The scenario that I am spinning is that a loss leader pricing strategy in Year 1 is used to build up a large regional customer base which becomes sticky to Company X as they slowly increase their pricing to cover costs. The risk corridors over three years provides significant subsidy to these costs while the other insurers in the region have either older/sicker populations or very few members at all so covering fixed costs are difficult.
This is speculation, but there is precedent for similar behavior from Medicare Part D and the logic works to play such a game with risk corridors.