Cell phone companies will often engage in loss leader sales to get people on renewable multi-year contracts. The logic is simple. Once someone is on a contract, they are very unlikely to switch, so a short term loss and mediocre service will produce a long term customer and thus a long term revenue stream. Insurance companies do the same thing. They’ll aggressively price products to attract membership in the first year, and then jack up rates to actually profitable levels in the second and third year. The bet is that most people will shrug their shoulders and stick around as the cost of switching insurers is high as it is painful and uncertain. This is known as buying a market.
The Exchanges suggest that insurers can only rent markets, not buy them. There are two interesting pieces of evidence for this assertion. The first is that the PPACA exchanges had very unusual buyer behavior on the second time around. Buyers in the first period actually went back online and looked around for new deals. Roughly a third of all covered lives that had a 2014 policy and wanted a 2015 policy went back on line to look at their options. Half of that population switched. Switchers tend to be healthier on average than non-switchers, so a 15% switch rate from high cost/low value plans to low cost/higher value plans means the plans that lost membership lost a lot of their profit margin. This is market discipline in action.
Secondly, there is an interesting tidbit from the Oregon rate requests for 2016 (all from ACA Signups ):
this handy BizJournals article by Elizabeth Hayes from a couple of weeks ago:
The numbers are in: It appears that Oregon consumers were fairly price sensitive when it came to choosing health plans this year.
LifeWise had the lowest rates, at $222 a month for a 40-year-old Portlander on a silver plan. Probably not coincidentally, it more than doubled its individual membership in plans that comply with Affordable Care Act guidelines.
As of March 31, LifeWise has nearly 37,000 members in ACA-compliant plans, up from 4,735 last year, according to the Oregon Insurance Division.
So Lifewise looks like it attempted to buy a decent chunk of the Oregon market last year with very low rates. It was reasonably successful as its membership increased by 800% in a single year. This shows that people are willing to change insurers. However, Lifeline is also asking for a large price increase to cover their actual costs. Other insurers in Oregon are requesting rate drops. It looks like the low cost Silver plans from all of the major insurers are converging into a fairly narrow space once the price increases and price drops are approved.
This is predictable. Low cost silvers are competing for cost conscious consumers, and they are creating a distinctive market 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. They are aimed at people who are getting subsidies are extremely aware of every additional dollar they have to spend on monthly premiums.
Low cost Silvers from different insurers after two years of experience will start to look very similar. They will be narrow networks and primary care physician requirements. Insurers who deviate from this model will either get the entire population, including the very sick at fairly low premium levels or get very little membership as members move elsewhere.
I don’t think the Exchange markets are structured to enable insurers to use loss leaders to buy membership in most reasonably competitive markets. Insurers can probably get away with that strategy in regions where there is only one or two other competitors and there is significant perceived quality differences, but that is not the dominant scenario right now.