Small plans and payer-providers

This is a follow-up from yesterday’s post on low membership insurers on the Michigan exchange.  What size is too small, and what is Meridian doing?

An insurer is too small when its covered population and their premiums are too small to form an adequate risk pool and when the premiums are inadequate to cover the combination of medical costs and administrative support costs.  That number will vary greatly depending on the situation.  Twenty nine members is definately too small to be a sustainable risk pool.  That risk pool blows up if one of the twenty seven year olds has a baby who needs a week in a NICU, it blows up if there is a covered family in a bad car accident, it blows up if one person needs Solvadi while another needs chemo.  These are all relatively rare but not unusual events.  Reinsurance will help increase the effective depth of the risk pool, but at twenty nine people, reinsurance is an eye dropper full of water to add to the sink.

Even if nothing wrong happens, twenty nine people is insufficient to pay for one full time customer service rep much less the rest of the support staff needed to make an insurance company run.

Blue Cross and Blue Shield of Michigan is covering approximately 300,000 lives on the Exchange.  That is definately big enough to keep the insurer viable as an entity.  But where is the in-between?  On Exchange, since the premiums are fairly low, and the admin costs are fairly high as evidenced by the 80% allowable Medical Expense Ration (MER) instead of the large group 85% MER, the minimal viable population to be served is larger than it would be for a high cost special needs Medicare plan or large group commercial plans.  Several thousand members are probably the minimal viable Exchange population if the objective is for the Exchange operation to be a break even proposition or better.

So what is going on with Meridian?

Meridian has an exclusive provider contract with a local hospital chain in Michigan (Bronson Health).  Bronson Health runs six hospitals and a bunch of other facilities.  They employ 6,000 people . Healthcare is usually a high wage field, Bronson also provides healthcare benefits to their employees.   Bronson offers a wide array of services at their owned facilities, so what I am betting is that their employee insurance is offered via what is called a home host arrangement.

Home hosts are very common arrangements for medium and large  hospital employer groups.  In a home host, plans are designed so that members are steered to use their employers’ owned locations as much as possible. This is done in two ways.  The first way is to build a very narrow network where the only par-providers are owned providers.  The other way is to use a tiered benefit strategy where the owned providers have much lower/no deductibles while a broader network of providers have high deductibles attached to them.  Some home hosts configurations will use a mixed strategy of a very small inner network, a reduced broad network and then cost sharing to steer people to the owned providers.  Most home hosts (unless they are from world class comprehensive medical centers) will have arrangements with specialized providers (burn units, transplants etc) outside of the network to handle the very expensive but only a few times a year events.

Bronson is large enough to have a home host arrangement make sense.  Bronson is also large enough to be self-insured so their insurer was on an administrative services only (ASO) contract.  Big home hosts using an ASO means a provider network has been built and the employer has already taken on all of the tail risk.  6,000 employees also means the risk pool is big enough that population health management makes sense.  It is only a few evolutionary steps from being an ASO Home Host to being a full service insurer that sells to the general public.

The Exchanges lowered the cost of entry into the insurance marketplace and provider for reasonably transparent comparisons between products.  If a big hospital group can offer its own insurance, it captures local dollars and keeps them internal, while also improving population health management data streams which could be quite important as ACOs take-off.  Being an exclusive provider to a very local and limited narrow network insurance product is a worthwhile gamble for a medium to large local hospital chain.  It might not work out, but if it does, there are numerous case examples of excellence where the hospital is the insurer.

To me, this is a reasonable bet that might not be working for Meridian but ex ante, it was a reasonable gamble.