Paul Michael Cohen is running some interesting data on Exchange competition and premium pricing. He has tested two theories of competition. Does more insurers on a given exchange lead to lower average premiums? Does more insurers on an Exchange lead to lower minimum premiums (ie the Second Silver benchmark?)
My first analytical approach was to plot the mean monthly premium in each state (by coverage level) against the number of unique insurers in each market (see R code on Github). A basic linear regression of premiums by number of unique insurers and by coverage level revealed no significant relationship….
Average premium rates are insensitive to the number of insurers on the Exchange. I am not too surprised.
However, it is possible that the important unit of analysis is not the mean premium in each market, but instead the minimum premium in each market….
There is a significant negative relationship between increased competition and health insurance premiums for all coverage levels in 2014 and 2015. The regression model (collapsing 2014 and 2015 rates) suggests that each incremental market entrant corresponds to a 3% reduction in monthly premiums. Moreover, this trend continued as more entrants entered the market in 2015. However, linear regressions by year suggest that the size of the competition relationship is decreasing: the effect of an incremental insurer on premiums was -3.7% in 2014 and -2.8% in 2015…
This result makes sense to me as the relevant problem that insurers, or at least insurers in my market, have been trying to solve is who offers second lowest priced Silver.
The subsidy structure of the Exchanges determines the nature of the competition. Subsidies are determined by the price of the second least expensive Silver in a given market. A family is expected to contribute a certain percentage of their income as determined by the Federal Poverty Line. A family at 101% of FPL is expected to pay 2% of their income, and a family at 399% FPL is expected to pay 9.5% of their income for health insurance. The gap between the expected contribution and the price of the second least expensive Silver is the subsidy level. Most people on Exchange are premium price sensitive. These two facts lead to significant segmentation in Silver;
there is a strong incentive for insurers to offer at least a Silver plan that is either the cheapest two Silvers or very close to the subsidy cut-off.
This segment in a competitive market should see a cluster of plans that are at the subsidy line plus or minus a couple percentage points. These plans are the first segment. They tend to be very restrictive in all modifiable aspects. HMO’s with gatekeeper and strict authorization processes are likely to be here while open access PPO networks are unlikely to be in this segment. The networks will tend to be very narrow as the pricing model is Medicare plus a small kicker….and insurance companies are avoiding the high cost providers if they can. These are the super narrow networks where the goal is to get a Silver plan that is either top 2 or really close to top 2 in pricing. They are aimed at people who are getting subsidies are extremely aware of every additional dollar they have to spend on monthly premiums. If we had a public option plus 5% scheme in place, it would fall into this segment….These segments were haphazardly defined in 2014 as companies were mostly shooting blind on both what the risk pools looked like and what their competitors’ strategies are. 2014 is a successful beta testing year. I think the Silver segmentation will be much clearer in 2015 and very obvious in 2016 as more data and experience comes into play.
Most of the customers are in the Subsidy Silver segment. That is where more companies are shooting for. They want to get either a Top 2 Silver plan or something within a couple of bucks of the Top 2 Silver plans where marginal differentiators (networks, customer service, reputation for not fucking people over etc) can push people to the slightly more expensive product.
There are two mechanical points to note.
From a mechanical point of view, once a basic narrow or super-narrow network is set-up, approved and priced, expanding offerings is fairly simple. The insurance company knows that if its super narrow network meets both basic regulatory approval and marketing approval, then throwing another 20% of the entire provider population at the network will also meet regulatory approval and marketing approval. It knows that removing a gatekeeper requirement and converting an HMO plan to either an EPO or PPO configuration will also meet approval. It knows the benefit design can be built into the claims system without too much hassle.
Secondly, a company will offer the same network, the same plan type (HMO, EPO, PPO etc) at most if not all benefit levels. The difference at that point is benefit configuration. A Bronze plan on Mayhew Super Narrow HMO could get a $5,500 deductible while the Platinum on Mayhew Super Narrow HMO gets a $300 deductible. The basic architecture of a Second Silver competing plan will propogate to all metal bands.
Once a Second Silver competing plan is built on the narrowest and tightest specification possible, the marginal cost of loosening constraints from a system architecture and system plumbing perspective is fairly low. Loosening constraints leads to higher prices for three reasons. The first is the sickest people will often choose the broadest coverage. The second is PPOs and indemity plans have minimal constraints on seeking expensive care while thirdly, all the expensive providers are in the network for routine care.
The cost of developping broad plans with minimal constraints are fairly low. These plans are reasonably well defined and generic so the pricing converges among most competitors becaue there is no differentiation between insurers. A broad PPO is a broad PPO. As Austin carroll notes, this is expected:
I think that premium costs are likely being lowered by narrowing networks and making deals, and that’s more likely to occur with more insurers.
But the incentive to make deals only applies to the segment of the market where the subsidies drives cost consciousness as everywhere else the marginal cost of offering a broad product is fairly low, and it provides some market segmentation for the insurers.
Someguy
If pricing is not sensitive to the number of actors in a market, then there is either a non-competitive cartel at work (collusion) or there is no realistic source of competition to drive costs down.
In this instance the market appears to be fully controlled by regulators at the state and federal levels.
Cost cramdowns can now proceed.
The related point is that if the number of actors is irrelevant to price, we might as well just pick a winner and award a monopoly, since monopoly pricing will be the equivalent of market pricing. This is likely to happen if the insurers who have trouble fitting within the rates structure abandon the market. We should encourage that it will make the now inevitable transition to single payer (sooner or later, you pick ’em) a lot less complicated.
Richard Mayhew
@Someguy: No, that is not what the post is saying.
There is a lot of price competition at the subsidy level where the networks are narrow, the gate keepers are strong and fundamentally there is a lot of differentiation going on. Mayhew Super Narrow HMO is a very different product than That Other Guy Super Narrow HMO and the pricing reflects that.
Mayhew Broad PPO is 98% similar to That Other Guy All Inclusive PPO and the pricing reflects that.
Parmenides
I’ve been searching around the marketplace at plans and the differences are sometimes completely non obvious and in some cases seem “too good to be true” for my particular circumstance. Basically my wife has a health concern that makes the size of deductible and the after deductible co-insurance rate one of the most important things. But oddly there doesn’t seem to be a difference between gold and silver plans on that metric. I can find co-insurance at 20 or 30 percent around all metal bands with higher deductibles on gold plans then silver. I even found one plan that has a deductible of x with a personal cost at the same x and everything that I could check free after words for about the third or fourth cheapest premium in the silver band. None of it makes sense.
Parmenides
Also, in my SC marketplace the difference between companies in their range of products is far more severe then the difference in same company metal bands. One Co-op is significantly cheaper, (my guess is a very narrow network) and with seemingly better deductibles than other companies in the same band. This Co-op was in the market last year and the other companies are late comers.
Violet
Richard, did you see this comment by joel hanes in your thread last night? He posted about a bad health insurance policy his step-daughter got. It was bundled with life insurance. He was wondering who he should report it to. I’m also interested in your take on it. Is it illegal? What’s with the bundling? What about the “exclusion of pre-existing conditions for a year” or it being called “Platinum?”
Interested in your thoughts. Thanks.
Richard Mayhew
@Parmenides: There are a couple of different ways to skin a cat or build a Silver plan — The expected value of a deductible plus expected value of co-pays plus the expected value of coinsurance can all equal roughly 70% of expected medical expenses but different companies will turn the knobs differently on each variable. Mayhew Insurance likes a lot of co-insurance in its plan design so our deductibles are lower, but our out of pocket max is higher while the regional Blue Cross likes high deductible no co-insurance designs.
It is a lot like football — plenty of teams can score 30 points a game… Some just chuck it all day (Green Bay yesterday) and others run it right down the throats of an undersized front (Patriots last night) so the end result is roughly the same (a blow-out offensive performance) but the means are significantly different.
As far as the Silver and Gold — if your family makes under 250% of the Federal Poverty Line, you are eligible for cost-sharing assistance which reduces your deductibles and out of pocket expenses. If you make under 200% the Silver plans you’ll see on Healthcare.GOV are WAY better than the Gold plans… really confusing terminology. I wish the HIX went to a term like “Silver Plus” or something to say this is different.