This is a general observation as rate increase news is prevalent. Most insurers are asking for rate changes of less than 10%, but the news is full of 15%, 20% and 30% rate increase requests.
One of the things that I have noticed about local and national rate increases is that there seems to be an interesting correlation between 2014 pricing and 2016 pricing. Companies that seemed to engage in loss leader strategies in 2014 are asking for large increases for 2016. There are two reasons for this. The first is that their actuaries may have been over-optimistic for 2014 but the past eighteen months of claims data has tempered their outlook.
Secondly, some insurers engaged in loss leader marketing. They priced low in 2014 to built membership with the hope of holding onto them. It was a bet on buying membership in 2014 and then using consumer stickiness to hold onto members. That bet may be failing.
In 2013, it was evident that some insurers were using the risk corridors were acting as de facto marketing subsidies:
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….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.
Competing insurers responded in 2015. In 2015, the 2nd Silver,which is the benchmark plan for subsidies,frequently changed. Other insurers either dropped their prices in 2015, or had much smaller increases than the 2014 loss leader, so the gap was narrower. Adverse selection of switchers versus stickers came into play.
Switchers, on average, tend to be far healthier than the average member, especially on the Exchanges. Exchange switchers who are receiving subsidies are extremely price sensitive and very healthy. They are getting insurance because they have to. They do not have an attachment to a provider, they don’t know where the lab is, they don’t have a preference for which floor they spend time on, and they don’t know the difference between an infusion drug and an inject-able drug. They don’t care because they barely touch the medical system. They are massive cross-subsdizers to the sick. They are looking for the best deal, and if the rest of the market moved the 2014 1st and 2nd Silver to 5th or 6th place in 2015, the potential healthy switchers have minimal reason to stay with the 2014 loss leader insurer.
Conversely, people who know all of the radiology techs by name and can inquire about their grand kids, the people who know which pharmacy has the nice pharmacist, the people who know that the 4th floor is a better floor to be on than the 6th floor during an infusion treatment, they are likely to stick with an insurer and their network because they have formed a treatment team and a web of relationships that is providing care to them. The sick stick.
Finally, new enrollees who entered the Exchanges in 2015 are healthier than 2014 enrollees (and significantly healthier than October/November/December 2013 initial enrollees) as they had self-selected as not seeing insurance to be as urgent of a need as 2014 enrollees. These new buyers are more likely to go to the 2015 1st or 2nd Silver.
All of this is reasonably informed speculation that insurers that engaged in 2014 loss leader strategies are seeing high 2016 rate increase requests because their current risk pools are significantly sicker than average and the back end risk adjustment and risk corridor provisions won’t be sufficient for break even.
Just yesterday I saw a link on twitter to an article that claimed big rate hikes were due to insurance companies uncertainty because of the King case. Made out of whole cloth or certain degree of truth to that?
@Valdivia: I don’t know. King would be a material change so insurers could refile in most states, but I do not know
Hi Richard. Great information as always.
Got lost a bit in the opening paragraphs as it seems there were some missing words or sentences that were started then re-started without getting all the old sentence out of the way. (Reasons twice in a row, etc)
Keep up the great informative posts.
@Richard Mayhew: got it, thanks.
It’s anecdotal, but I think the self-selection thing is big re: lower income young parents. They never cared if they had health insurance because they believe they don’t need it. They wanted health insurance for their children, which they have (and had) with Medicaid. That’s hugely important to them, although obviously most children are healthy so it’s not entirely rational as far as “risk”- it may because they had trouble getting care for their children without insurance of some kind because they’re obviously not the best credit risk for a provider. I know they have had trouble signing as the “obligor” if they already owe a provider and don’t have Medicaid.
Anyway, they seem to be almost blithely opting out- same formulation- “as long as the kids are insured I’m okay” I don’t know what that means as far as penalties down the road but I keep hearing it.
@Edmund Dantes: Cleaned up a bit — the joys of typing on a smart phone while sitting on the bus before my first cup of coffee.
@Kay: Penalities depend, if they are making under 100% FPL in non-expansion states, then nothing, and in expansion states, they’ll be subject to the mandate at 2.0% of income this year unless they find a fairly broad exemption.
I think this happened already in Maine from 2013 to 2014. There was a big cost increase in all the premiums in the second year and my hunch is that it is because we are a small state with an aging population that has a higher smoking and obesity rate. I’m hoping we won’t see as big increases this year.
This may be self evident to you but is there a definition of healthy? What level or cost of care would still define a person as healthy to their insurer?
@MomSense: good question… And in the context I write, healthy is purely relative/comparative….
Man, I wished I lived in the world you describe. Where I live we have 2 choices, Blue, and other Blue, and the difference between them is pennies.
@cahuenga: What state?
CA, San Luis Obispo
I’ve been a staunch supporter of the ACA from the start, but I was always worried about the system being gamed by insurance companies. Anything that complex gives an advantage to faster, more adaptable players like the insurers over government, especially when they have some input on how the rules are written. From what you describe, the risk corridors don’t prevent gaming, although they force the adoption of more subtle strategies.
Political/philosophical preferences aside, that always seemed like a major point in favor of single payer, that it’s harder to game.
(Fantastic series of posts, by the way. Reading them makes me realize how sadly lacking the media coverage on the ACA is.)
I peeked at Covered CA and I think you have a provider problem — Blue has locked up all of the contracts and other insurers can’t get in. It’s a similar problem to what the whole state of Colorado has — small population without a lot of facilities, so you don’t have a lot of competition.
The CA legislature is doing a lot of health care bills right now (one just passed the assembly to prevent “bait and switch” out of network providers when you’re hospitalized), so it’s absolutely worth it to contact your assemblymember and state senator to complain — they are motivated to punish insurance company shenanigans right now. Make sure to copy the state Department of Insurance as well since they’ve fined Blue multiple times and would be thrilled to have something else to go after them for.