One of the minor little stories has been an interesting question as to whether or not the health insurance co-ops are too cheap. Are they pricing too far below costs, or is their business model sufficiently different that they can price below competition while still covering their medical claims costs?
A 30-year-old New York City resident can buy coverage from Health Republic, a startup nonprofit insurer, for $307 per month. A similar policy from Aetna (AET) costs $528 per month—71 percent more….
To some big insurance carriers, premiums such as Health Republic’s look too low—that is, the fees collected won’t be sufficient to cover the medical claims of members plus the cost of running an insurance business…
Martin Hickey, chairman of the trade group for co-ops, says they can offer better prices because they don’t have to build profits into their prices. Large national insurers “have shareholders, and they have to generate a return,”
I think both stories can be true. Some co-ops might have made either a modeling decision that they will attract a very healthy and cheap population. Other co-ops may have decided that the first few years of risk corridor payments can subsidize a membership uberalles mentality, so they are buying a membership base by pricing significantly below costs. Other co-ops may legitimately have several business reasons as to why they are significantly cheaper than major insurers.
What could those reasons be?
I think there are two major reasons that co-ops could be significantly cheaper than major insurers that are merely offering new twists on pre-exisiting products. The first is simple. The co-ops are still mission driven organizations that are not heavily gold-plated. The co-ops top bonus level might be weed and munchies instead of hookers and blow at major national carriers. I’m betting the compensation structures at the co-ops are both lower and much narrower than compensation structures at major carriers.
The lack of hookers and blow could plausibly explain away a few percentage points of the cost differential. I don’t think it is a major plausible driver of pricing changes.
I think the major driver is the co-ops are new, narrowly focused and don’t have pre-exisiting relationships that they need to continue to cultivate.
What do I mean by that?
The co-ops have been focused only on Exchange products. All the pre-launch modeling strongly suggested that the Exchange market would be extremely price sensitive and not as concerned about being able to see every doctor in the area. Assuming minimal variation in administrative cost structures, the two major areas where health plans can hold down costs are what they pay for procedures and how many procedures they pay for. A co-op that is building a network from scratch is mainly concerned about builiding a network that meets regulatory requirements and is sufficiently large to meet minimal marketing goals. This allows a co-op network team to say no to providers that want more than the offered rate.
Major carriers that offer multiple lines of products (Medicare Advantage, Medicaid, CHIP, SNP, major group commercial, Exchange etc) already have their pre-exisiting networks built out. Their task, if they are building a “cheap” network from their current providers is much tougher. There is often a strong need to keep keystone providers and provider groups “happy” so excluding a major group because they want 125% of Medicare instead of 105% of Medicare is a much tougher and less likely to occur decision for a major legacy insurer than for a co-op. The group is needed for other products, so pissing them off for a small slice of a small market may not make business sense if that group decides to leave the legacy carrier’s large group commercial network. Furthermore, major legacy carriers have often had an insitutional network instinct of more is better as the cost of adding one high cost provider that makes a single commercial large group happy could be spread amongst 300,000 members. If that single expensive provider is the key to bringing on 3,000 new contracts or not, that provider would almost always be included.
The second area of cost savings that co-ops may have an advantage over legacy carriers is utilization management. Co-ops since they are new, can experiment with different billing models. Capitation or pay for performance or bundled payments or reference pricing are all models that have indicated an ability to hold down low value care while still delivering healthy members. For most providers, these models are a change from a fee for service routine. They might be willing to adapt to something different for a brand new carrier but if their billing department has to bill several different ways for a single legacy carrier, that is an added layer of complexity they may not want.
My gut feel is some co-ops are underpricing either through modeling or strategic intent, and others are betting that their ability to only focus on Exchange will give them a much cheaper and efficient provider network. If I had to bet, I’m betting most think they have a strategic advantage on their networks when compared to comprehensive legacy insurers.