Insurers, monopolies and multiple plans

Another Scott asked an interesting question yesterday on Silvergapping in monopolies:

Why would a company want to go through the hassle of having 3 similar plans when 2 would be more compelling for customers? Especially if few or no other companies are competing for the same customers? (I can see the benefits of market segmentation in selling, say, cell phones or blue jeans, but not in selling closely similar insurance policies. Changing the stitching or colors is cheap, changing the plans and having more people evaluate claims, appeals, etc., is expensive.)

This is a damn good question.  I think there are a couple of different stories going on. One of the key assumptions that I will make is that the insurer is not in a surprise monopoly situation.  A surprise monopoly occurs when there are more than one insurer filing for a county or a region at the start of the process and then all but one insurer leaves the county during the rate filing process.  I am assuming for this post that an insurer is fairly confident that it will be a monopoly in a given county/region by February of the filing year.

If the local monopoly is in an isolated and small population region, the plumbing and compliance costs may overwhelm any potential increase in revenue and profitability if the insurer chooses to offer a sub-menu of plans from its broader portfolio.  Turning a plan on or off is not particularly expensive, but a custom quilt does make the marketing material messier and more expensive to produce and distribute.  If a county is a monopoly with only 300 potential covered lives in a region where an insurer thinks there are 100,000 covered lives to compete against in nearby regions, the administrative complexity to customize a portfolio for 300 covered lives may not be worth it.  Differentiation of product offerings can also lead to chaotic risk adjustment flows that are difficult to model as well.

In competitive regions, we need to make a distinction between an insurer with a pricing advantage against all competitors and insurers that have similar pricing profiles to all competitors.  An insurer that has a dominant pricing advantage over all its competitors in a region has a choice: does it want a smaller share of a larger market or a larger share of a smaller market. The low price insurer choosing a smaller chunk of a larger market will offer one very low cost silver plan.  A high cost insurer will set the benchmark and the market.

If it chooses to have a large market share of a small market, the price superior insurer, given the ACA cost linked subsidy structure, will chose to Silver Spam the benchmark point.  It will offer the cheapest silver, and the benchmark silver at a price point that is significantly below local competitors.  It may also offer several additional silver benefit designs with slight tweaks to attract different segments of the population.  These tweaks can include additional dental and vision services, a no-deductible but high inpatient co-payment design that is attractive to young invincibles or an HSA design.  This basic strategy maximizes net of premium subsidies for anyone choosing the non-price dominant insurer and potentially increases net of subsidy premiums for subsidized enrollees as well.

Insurers in markets where there is similar pricing profiles among multiple insurers that can all credibly offer a benchmark plan have to assume that the subsidized market will be fairly small.  At that point, they are looking for every advantage that they can in order to sell as there will not be amazing subsidized deals available.  The combination of network and benefit design may be a key differentiation.  That is a realm of the dark arts that I don’t dabble in.

These are rational reasons for an insurer to offer multiple, similar plan designs which may lead to consumers being slightly to significantly worse off compared to a pure silver gap maximization strategy in any and all monopoly counties.  Another reason is that, for most insurers, the ACA individual market is not a dominant part of their business so they don’t have a monomaniacal focus on it with multiple people looking for every edge and thinking through the rules and interactions every moment of the day.  I do this because I have found it fascinating but the ACA market is 3% to 4% of the US population and its quirks are not broadly generalizable to the far larger employer sponsored third party administration contracts, Medicare Advantage or Medicaid managed care contracts that most insurers build their business models around.