Are the co-ops too cheap

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?

Business Week outlines the question:

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.

29 replies
  1. 1
    David in NY says:

    Thanks again, Richard, for your insights and for the clear expression you give them.

  2. 2
    japa21 says:

    I think, like you, it is a mixture of things.

    The legacy carriers are basically operating up to the edge of what is allowed by law, be it 80% or 85% of premiums that must go to reimbursing for actual care. The co-ops are probably operating moree in the 5% range.

    Obviously, that doesn’t account for all the difference, but it is a start. Secondly, some co-ops, while they are building a network, are renting out existing networks from companies that specialize in that product. Althoug, in general, the reimbursement may be a little higher, administrative costs are lower, which tends to offset the increased reimbursement, specially if their basic membership tends to be younger and healthier than the general population. However, I don’t know if the last statement is an accurate one.

    I have been meaning to ask you what you see happening down the line. As you frequently point out, one of the reasons for the narrow networks is that many providers, be they individual physicians or hospitals, are reluctant to accept the rates that payers are willing to pay for the exchange products.

    I have been around long enough to remember the onset of HMO’s and how many providers avoided them for just that reason. Although actual HMO membership is decreasing, most providers now belong to HMOs and accept the lower reimbursement simply because it became such a large drive of patients.

    If the exchange products increase in membership, do you see the same dynamic repeating itself. I am thinking specially of as more small businesses and even larger ones start utilizing exchange policies for their employees, or drop coverage but provide some subsidization of their employees to purchase exchange policies.

    If we reach the point where 20 million plus are insured through exchange policies, a lot of providers, who currently are unwilling to accept the lower rates, may well see their patient loads drop to the point where, in order to maintain a cashflow, they will accept the lower rate.

  3. 3
    Tractarian says:

    Are the co-ops too cheap

    Are the rents too high

    Who are we to say

    Benghazi (pronounced as rhyming with “high”)

  4. 4
    🌷 Martin says:

    I mentioned once before that I know the principals at one of the new Co-ops. I finally got a chance to talk to him recently and he’s optimistic that they got most of it right. He thinks their pricing is close and could see next year seeing minimal if any increases because his risk pool is younger than they expected. They drew most of their new policies off exchanges, though, which was a bit of a surprise but his market is almost exclusively conservative, so maybe not such a surprise.

    The big concern he has is that the state BCBS that they were competing with weren’t on the exchange this year, but will be next year. That’s his big risk right now.

    He’s trying to serve rural customers so they are doing a number of things differently than the major insurers. There’s more contracts with small providers, his policy holders are only looking to go to the high-rent hospitals when something major happens, etc. And his overhead is much lower than when he worked at a major insurer. They’re trying to stay a small operation in terms of staffing, and contracting a lot of their services out. Their advertising is very targeted and cheap (and apparently effective).

    Now, NYC is a whole other ballgame, but it sounds like most things fell into place as expected, and some things better than expected.

  5. 5
    the Conster says:

    BCBS in Massachusetts (classifed as a “charity”) gave their departing CEO $11 million in separation pay, and were paying all of their 12 directors in the high five figures until they got exposed. That’s a lot of premium payments.

  6. 6
    danielx says:

    What could those reasons be?

    You’ve already mentioned the compensation structure aspect. I would suspect also that a nonprofit co-op is spending a great deal less on that somewhat nebulous category known as marketing, and hence less on marketing overhead (read: executive VPs getting paid in the mid six figures).

  7. 7
    Fred Fnord says:

    The MLR is now regulated. At maximum, hookers and blow can only be 20% of your spending. That’s a lot, but I doubt it can account for a 71% pricing differential even with the new math.

  8. 8
    Schlemizel says:

    @the Conster:
    These small startups could fall into a couple of subgroups. One would be that they are people intent on doing good and will only accept a reasonable amount of compensation. The other group may view these first few years as a ‘loss leader’ they will get people signed up & paying their premiums then gradually ratchet them up to the point they can pay those sorts of numbers. Its pretty much the same with all charities.

  9. 9
    MomSense says:

    I’ve been wondering several things-will the big insurers have to change their pricing models to compete with these co-ops next year or are their non-exchange policies sufficient that they are not going to worry about the co-ops beating them for exchange business.

    I haven’t heard much discussion,except in a sort-of underhanded way from House Republicans and their spinners, about what might happen when the employer mandate requirements finally take effect.

    The third thing I have been wondering about is after several years of experience with all the ObamaCare changes, are insurance companies and co-ops going to want to expand Medicare to include let’s say the 55 and up crowd. For most of us, things really start to go wrong at that age and we need more than tune-ups. Now that insurance companies are dealing with more catch-up care costs they may want to let Medicare take them over.

  10. 10
    JGabriel says:

    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….

    I may be wrong, but I think another factor here may be overpricing the NY market. Aetna has been offering coverage in NY for years, when NY had mandated community rating. The price of insurance skyrocketed because people, if they weren’t covered at work, often avoided buying policies until they needed them.

    So, it’s possible that Aetna is basing it’s expected costs on a on a partially outdated cost model where the new co-ops are calculating from scratch. I don’t think that’s a factor in every state, but it could be at play in states that had community rating without mandated coverage.

  11. 11
    grape_crush says:

    I’m sure that if you asked a bank, they’d question how credit unions stay afloat. The real question is why are the Bigs’ premiums so much higher than these co-ops. The problem is that I don’t have a comparison between the two and won’t for at least a year or so.


    Given the 80/20 rule, a way to make executive bonuses bigger would be to increase the amount in premiums collected. 20% of a billion gets the COO to is Maserati faster than 20% of a hundred million. Not to suggest that there is some form of price fixing going on, as I’m positive that insurers are above doing something like that…

  12. 12
    dollared says:

    I’m very familiar with Group Health Co-op in Washington State (I realize it’s a different kind of co-op), and they are consistently 20%-30% below the main alternatives. They have a narrow network called “only our people” and they keep compensation costs low by offering incredibly flexible employment terms for low pay – for example I would guess that 20% or more of all family practice positions are job shares. Plus, no million dollar execs. Pluses are superb well care and really great coordinated care. Negatives are they are really slow to pull the trigger on anything that can be delayed or considered optional – I changed insurers to get my ACL repaired.

    It’s our little slice of Canada, but I would recommend it as a great solution for most healthy people.

  13. 13

    Well, the law allows an 85% medical loss ratio. Let’s say that operating costs are similar to Medicare’s. So if all other things were equal and Aetna were a non-profit their premium would be $450.

    Hunh. Is it possible that Aetna is doing some creative accounting, to make their legal MLR appear higher than it actually is?

  14. 14
    Belafon says:

    @grape_crush: True, but if they are insuring 10 times as many people to get the CEOs salary up, they have to be covering 10 times as many people. That just means the company is larger. The great thing about the 80/85% requirement is that all non-medical costs can only grow linearly with earnings, not at some arbitrary rate.

  15. 15
    Omnes Omnibus says:

    @Belafon: I think what g_c was saying is the company could charge more, pay for more and then keep more. That is, they could artificially make the pie bigger. OTOH, that would simply be the same as offering a gold instead of a silver plan. The people who want a silver plan will simply look elsewhere.

  16. 16
    Eric U. says:

    I would be willing to bet there are expenditures that don’t actually pay for medical care being charged to the 80%. My insurance company contacts me all the time with “wellness” offerings and there are nursing contacts as well. That ain’t coming out of the ceo’s pocket, it’s in the 80%, and I’ll bet the profits are pretty good. I’m under the care of a physician that does this sort of thing for me and I would stop the insurance company if I could, but I can’t.

  17. 17
    Violet says:

    @Eric U.: I’ve asked my health insurance company to stop contacting me about those wellness offerings and so forth. They said they can take me off the call list for X amount of time. Like a year or through the calendar year or something. Then it starts again.

  18. 18
    Belafon says:

    @Omnes Omnibus: True, and that could be a possibility. But you would eventually run out of things to pay for. Plus, this would be where competition would be helpful.

  19. 19
    Belafon says:

    @Eric U.: What are the “wellness” offering?

  20. 20
    Omnes Omnibus says:

    @Belafon: I agree. Like I said, it is effectively the same as offering gold instead of silver plans. If people don’t want the gold plan, they won’t buy it. They will find someone who offers a silver plan.

  21. 21
    Eric U. says:

    @Belafon: the nurses called me because they wanted to help me lower my blood pressure. Also things to get me to exercise and lose weight. Just this week there was one to track my exercise. I exercise enough that it might actually be a hazard to my health, and my doctor and I are monitoring my blood pressure, which is within measurement error of being normal. I’m pretty sure the blood pressure thing would go away entirely if I stopped drinking coffee and if I could quit my job. Like that’s going to happen.

  22. 22
    grape_crush says:

    @Omnes Omnibus: ” I think what g_c was saying is the company could charge more, pay for more and then keep more”


    ‘Cept kinda-sorta the part about paying for more. It’s true that some of the increase would get soaked up paying for the things insurers weren’t required to cover prior to the PPACA or for medical services that were more likely to be denied or given the run around before the insurer paid…

    Those premium dollars – when not being used to cover claims – don’t just sit there in reserve; they’re invested. The incentive is to still there to do things like narrow the number of service providers included in a plan and negotiate reimbursement costs down. The more premium money available, more profit made from investments. I would presume the returns on investment aren’t counted as ‘premium dollars’ – so as not to be subject to that 80/20 rule – although that profit wouldn’t be made without them.

    > “…that would simply be the same as offering a gold instead of a silver plan”

    Or a silver plan for a gold price?

  23. 23
    JoyfulA says:

    @Violet: Me, too! The insurer just about insisted on sending a health professional to my home monthly, just to check. I have an internist I see twice a year for that purpose, and she’s got 20 years of history on me. Not to mention free gym! (a steppers joint my ortho forbids), free calls to advise me on my health problems (I have a doctor, thanks), on and on.

    I told them, with finality, to stop bothering me.

  24. 24
    Harold Samson says:

    Having worked in big-insurance IT, I saw massive amounts of waste. It’s not all executive overpay.

    These places operate like they have a huge pipe of guaranteed money and virtually no market pressure at all, which has been pretty much true in most markets.

  25. 25
    Belafon says:

    @grape_crush: Some of those will be covered by other provisions of the ACA, like where they are required to reimburse you for overpayment. Some of the things will have to be tweaked – see Eric U’s wellness offerings – which means we’ll need people in to do the tweaking.

  26. 26
    grape_crush says:

    @Belafon: “like where they are required to reimburse you for overpayment.”

    In 2011, that was around 1% for the Bigs. No idea if that amount was related to just pure premium income or premium plus investment income. Probably the former.

    > see Eric U’s wellness offerings

    I think those costs are included in that 20%.

    @Harold Samson: “These places operate like they have a huge pipe of guaranteed money

    They do. Kind of like the funeral business being part of a recession-proof industry. People can’t easily do without health care or an undertaker, right?

  27. 27
    protothad says:

    I’m very happy with my health care co-op plan from Common Grounds, and it is definitely low cost. I’m not sure how their provider network compares to the for-profit plans on the exchange… I just know we used our insurance while in New Orleans despite purchasing it in Wisconsin and had no problems using their extended travel network of providers. They’ve already paid our first claim with no fuss.

  28. 28
    Sondra says:

    @🌷 Martin: …I worry about what services “they are contracting out” as that usually means that service is more expensive. The contractors would also have to be non-profits in order for that to make sense.

  29. 29

    @Eric U.: the “wellness” offerings are partly devices to save money by preventing acute care, and partly ways to data mine medical data that is not protected by HIPAA, which can then be sold.

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