Building a new health insurance company requires the builder to have deep pockets for two reasons. The first is that an insurer is required to have sufficient reserves to pay out worst case scenario claims even if the insurer collapses. That usually means the insurer needs to keep between six and nine months worth of premium revenue in cash or near cash. Secondly, building a plan is expensive as a fixed cost. For instance, any new insurer would need to fill my old position for a good twelve to eighteen months before the first payment from a customer was received. The insurer would need to hire the plumbers, the architects, underwriters, medical directors, legal, and regulatory compliance teams (ie the really expensive people at an insurance company). The core team to build out a compliant plan is independent of the projected enrollment.
And once membership is added to a plan, that core team can’t disband; they are the people who keep everything running reasonably smoothly. Fixed costs to operate are a bitch.
I was thinking about this as I saw a couple of recent start-ups and their cost structures:
The co-ops are true start-ups from scratch and their first year was rough if they could not get massive enrollment at fairly low premiums.
Eleven co-ops—Arches Health Plan in Utah, Colorado HealthOP, Community Health Alliance in Tennessee, Consumers Mutual Insurance of Michigan, Evergreen Health Cooperative in Maryland, Health Republic Insurance of Oregon, HealthyCT in Connecticut, Land of Lincoln Health in Illinois, Meritus Health Partners in Arizona, Minuteman Health in Massachusetts and Nevada Health CO-OP—had net loss-to-surplus ratios that were worse than CoOportunity’s….
Sutter Health Plus is in Northern California and it is an HMO that is being launched by a large hospital change. The hospital chain is attempting to become an integrated payer-provider with a picket fence around its operations instead of the castle wall that Kaiser uses:
Sutter Health Plus, the new in-house HMO at Sutter Health, lost $5.1 million in the third quarter, and $13.1 million cumulatively through Sept. 30, on $21.25 million in revenue, the Sacramento health system confirmed. Its first year of operational results began Jan. 1, 2014.
The fixed costs of building Sutter Health Plus is probably driving most of the loss as Sutter Health Plus is playing only in the employer sponsored market which is a far more predictable and healthier market than the Exchange markets. The Co-ops are getting hit with losses from starting up, building membership and usually taking on a very sick and costly population.
Baud
Good thing you’re a billionaire.
Xantar
Evergreen in Maryland was also partially a victim of the screwed up exchange here which meant their enrollment numbers were horrifically low. It’s really too bad because I’m a huge fan of the founder and CEO, Peter Beilenson. They’re doing a little better this year, but they’re facing an uphill battle because they’re new and unknown. The other problem is by their nature they cannot compete with Blue Cross Blue Shield on having the absolute lowest premiums on the marketplace. They are supposed to be a better deal when you actually need treatment, but people aren’t any good at assessing those costs.
jl
Off the top of my head:
Seems to me that the costs are not only fixed, but also could be considered sunk costs. That is, regardless of the time horizon, no way to convert the resources put into the start up into anything useful. Not fungible, as some fixed costs are during short term. So, firms have incentive keep plugging away as long as they see some profit, or in case of non-profits can cover fixed and variable coss over longer time horizon. Absent cash flow constraints.
Does the insurance oligarch have an opinion on this? What is the time horizon for decisions on whether to pull the plug? How many of the start ups will survive?
Also, I think Sutter is in some kind of Medicare line too, but not sure. And I think it has swooped up a lot of local, but relatively large, medical groups in northern California, and not sure how that figures in to their chances.
Edit: what is financing market like for these groups? How does it compare to other industries? What is lifeline for them in terms of financing from banks and financial market?
Nellie
Medicare and Medicaid administrative costs typically run at 2 – 4% of the costs of paying providers. Some states Medicaid administrative costs approach 1%. Commercial insurance are often north of 15%.
If we go to single payer (and there are multiple models) administrative costs drop dramatically and a lot of very well paid people are out of a job.
Richard Mayhew
@Nellie: Yep, but the problem, as Vermont found out is the transition is an absolute bitch with new winners and new losers, and the new losers will yell way louder than the new winners….
Nellie
@Richard Mayhew: As long as there is money to be made (and it’s a LOT of money) the Health Insurance Corporations and the politicians that are in their pockets will fight it tooth-and-nail. I never had much hope of seeing single payer in the US in my lifetime. But then I never thought we’d elect a Black President (twice!) or see near universal same sex marriage. Still got hope.
? Martin
The guys who started CoOpportunity are family friends, and there’s some important details to know in that story – some of which are not flattering to the principals.
The biggest problem the got into is that their plan was to have 11,000 members at the end of 3 years. They wound up with 180,000 in less than two. Many of those came off-exchange. Many of them were previously uninsured, but also many of them relatively young. They didn’t have a network capable of handling 180,000 members, they didn’t have reserves to support 180,000 – but neither did CMS. Losing $5M wasn’t the problem – the problem was that CoOpportunity needed more money than Congress budgeted to CMS to backstop the coops. It was more money than CMS had to fund all of the Co-ops. And this was 180,000 members from Nebraska and Iowa, mostly from Nebraska, where rural care is stubbornly expensive and where networks need to be quite geographically broad with a low population density – and where you had very little participation from the not for profits on the exchanges (their BC/BS plans aren’t on the exchanges). The other coops never hit the scale that CoOpportunity did, and CoOpportunity hit that scale faster than they could respond to pricing and faster than they could build reserves. They did try for a large premium increase into the 2nd year to compensate, but they were limited on what they were allowed to do there as well. Simply put, they couldn’t turn the ship fast enough and they weren’t allowed to turn the ship fast enough.
I won’t go too much further because it’s pretty certain these guys are going to be hauled in front of Congress before long and may find themselves in a courtroom as well. But this is a place where well-funded risk corridors could probably have salvaged CoOpportunity, but had Nebraska Blue and Wellmark been on the exchanges and the local opposition to the exchanges been lesser (many of these people are paying more for a policy off-exchange than had they gone on) they probably would have been better distributed among multiple insurers and less stress placed on the most vulnerable entrant to the market.