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.
NotMax
All well and good in a vacuum, but if the service or range or services is/are sub-standard in practice within a particular marketplace, if the payments are not prompt, if disputes regarding coverage or treatment are more frequent or prolonged versus competitive providers, if actuarial estimates consistently are outliers, the stickiness evaporates among those actually making use of the insurer, and bad word of mouth takes the driver’s seat.
hoodie
Seems like feature more than a bug. The drafters of the ACA wanted to encourage more aggressive pricing, with the constraints being imposed by customer service and other value issues. One part of consumer “stickiness” is the rates themselves. Yeah, they can raise their rates, but they’re starting from a lower baseline. This is even more transparent because the ACA provides comparisons.
Hence
and
Sounds good to me. People can change plans pretty easily. No controversy here, just different businesses taking different approaches.
Richard Mayhew
My issue is the highly possible gaming of the risk corridor rules to get a de facto marketing subsidy. Those corridors are deisgned for actuarially oopsies, not marketing subsidies.
Fair Economist
At this point, the insurance companies have very limited data on what their risk pools are going to look like. I don’t find it surprising in the least that they’ve come up with a very different estimate of how a narrow plan affects recruitment. I’m actually more surprised that most of the narrow Silvers fall into a tight range. That said, I agree that the narrow plans in general are an attempt to game the system and could potentially be a big problem.
aimai
thank you so much for this post. Although my innumeracy gets in the way I am learning a lot.
Can I ask you something? Does it not seem like the actuarial issues would go away when you turn the entire country into a single insurance pool? If everyone pays in there is no failure by the healthy to subsidize the sick.
Is one reason we can’t do that, politically, is that it would also force us to admit that we are only going to subsidize one level of plan–bronze or silver–and that we prefer, as a country, to pretend that everyone can get gold standard care or willingly forgoes care?
Also: given the low quotes we are seeing for “covering” the young and healthy this seems like some kind of weird shell game anyway. If we have 10 million “young and healthy” or 20 million (and that seems high for the uninsured anyway since there are only 44 million uninsured) and the prices quoted for their insurance premiums are low anyway why not (in a perfect world) have the government pay in for them until they use a medical service and then charge them retroactively for the missed premiums? The money would be in the system for the use of the older/sicker customers and the “young invincibles” would be covered when they tried to access the system.
pseudonymous in nc
Richard: can you talk about networks in the context of provider consolidation?
Where I am, the local hospital — a big player in the area, but a smaller player on a state/national level — is busily gobbling up specialist practices and even primary care providers in a way seemingly designed to ensure that it doesn’t get gobbled itself by one of the mega groups. In practice, that means a large group of services that would previously have been covered under specialist copays are now billed as hospital outpatient services and thus come out of deductible/coinsurance.
Is that something that we should expect to see from the provider side — an attempt to shift costs towards patient-billed services? If so, what affect does that have on the ACA’s plans, especially at the lower tiers with higher out-of-pockets? It seems like you’ll end up with the same amount of consolidation that you see in Kaiser Permanente, but none of the financial advantages for patients.
Joel
So, in other words, one of the Silver Providers is DirectTV.
jl
@Richard Mayhew: I agree. And after emphasizing that I love your informative columns on the innards of the 30+ U.S. experiment in lightly regulated relatively free market healthcare insurance and provision, to be provocative, isn’t the scheming on networks that you describe the kind cherry picking, cream skimming BS, that wrecks possibility of stable competitive equilibrium?
Why shouldn’t I just read this post and say, hey, great job ACA, you reduced the Stiglitz-Rotchchild asymmetric info insurance equilibrium destruction game just enough to make the market fall apart more slowly?
That is why I’ve thought that going Swiss (free market heaven, I have heard that from the pundits on high) in one respect was critical, and require one absolutely standard, identical, as in ‘same exact’ product to be offered on mandatory comprehensive coverage market. Bells and whistles would have to be offered on a separate supplemental market.
But I guess that would be even more outrageous than single payer. People couldn’t have been plausibly promised that they could keep all their crummy bare bones policies, which was not plausible to begin with, since insurance companies are going to stop their gaming their benefit design to attract the enrollee mix they want? No way.
That is why I’ve called the result of the ACA a path forward, but not stable and may well result in more chaotic turmoil in the market, in slower motion.
Edit: though on other hand, I just realized that what you describe would just be networks games with identical benefit designs. The network game would remain. So, I guess we have to get rid of the network game. Is that possible? That would totally change how insurers think about the way they make money. So, how do we reduce the network game? Unpossible I guess.
J R in WV
@Joel:
That is Good! I want mine from Google! That way they’ll know I’m sick before I do, and email me with a Dr appointment!
jl
TPM blog has some comments on news coverage on ‘gazillions losing their coverage’ headlines, calls the reporting ‘A Doozie’ and not meant in a good way. I’d be interested in what RM thinks about the scare headline of the week.
A Doozie
talkingpointsmemo.com/edblog/a-doozie
Gian
@aimai:
Is there honest data about “young invincible” numbers?
It seems like a talking point with no real data to back it up. Given the youngins who are thrilled to stay on parents policies, I’m inclined to think its an overblown talking point.
pseudonymous in nc
One of the common elements of functional systems that retain private insurance — especially late reformers — is core coverage with a tightly-defined sandbox for supplementary coverage. The Israeli system has four HMOs with a legally-defined uniform benefits package: each network prefers to use its own facilities where they exist, but the choice of HMO is more a matter of tradition (going back to their origins as Bismarckian sickness funds) with little switching between them, and the differences are fairly marginal.
pseudonymous in nc
@jl:
If you were paying for shitty insurance, and you can no longer buy shitty insurance, what have you lost? Politically, that is a hard sell, but it’s one that the WH has to make by talking about the way in which those policies hurt the people who bought them.
Perhaps Lisa Myers might want to spend a year on tiger-repellent insurance.
Another Botsplainer
@pseudonymous in nc: The people complaining about this are of the mind that they don’t care that they have shitty insurance because it was cheap. Now Obummer lied to them and they can’t keep their policy so the whole thing is a big scam. I guess this will be the new shiny object that the Villagers focus on. To paraphrase Heroes, Destroy the Village, Save the Country.
Gene108
@jl:
The only way to do it would be for state’s insurance commissions to step in and say what the base/uniform rates would be between insurer and provider, so providers would have no reason to not contract with insurers.
Networks have been treated as price and product differentiaters for as long as I can remember (16 yrs) in negotiating group benefits. You could pay more for a PPO network that covers all over the place or less for the HMO that only has a handful of local locations.
I never saw networks as a tool for managing risk selection. Food for thought.
Aimai
@Gian: i dont believe its a large number of people dither. Its not women, for one thing, and its not poor young men who probably have poor health histories even if they think they are invincible. And its a short term period so people age in and out of it rapidly. Ive seen no real numbers. Maybe Richard knows?
pacem appellant
Slightly OT, but for lack of a better place, I thought I’d ask here: A relative of mine on FB is opining Obamacare is going to cover pregnancy but not hip replacement surgery (she’s in her 60s). I don’t know if it’s worth engaging her, but is the correct response, a) yes, it does cover hip replacement surgery, too, b) it depends which plan you sign up for, c) aren’t you almost to medicare age, what are you whining about, anyway? d) you already have health insurance, why harp on youngun’s who might need prenatal care, e) cite your “sources”, please, f) some combination of the above, or g) crickets, since we’re under a family banner of truce right now, this might be seen as a breach of political decorum. Thanks, have a good morning!
Emerald
So I’m not unnerstannen’ all the fancy marketing tricks, but I do know that when I got onto Covered California, the site directed me to two plans that would be best for me: Blue Shield California PPO and Kaiser. It seemed that I could keep my wonderful doctor if I went with Blue Shield, but my sis says never trust Blue Shield, because they’ll refuse to pay if you step a toe out of their network.
Then I learn that they’re cutting their network in half. So who knows if my wonderful doctor will be in the reduced network?
Kaiser is using their full network. I went with Kaiser. I’ll take an assortment of lovely baked goods in to my wonderful doctor’s office and explain why. I know he’ll agree with my choice. Maybe I’ll return to him in two years when I get Medicare.
But for now, Kaiser was the only safe choice.
negative 1
All very true (and a great analysis) but if companies are either loss-leading or gettin’ freaky with the actuarial assumptions than I think you can pretty much call the ACA an unqualified success. Remember, the idea was that competition would eventually bring costs down. So what’s the ultimate risk, that HHS will assume some of the cost? It’s like a back-door way to single payer.