The health insurance market is a very segmented market. There are differentiations based on location, network, plan configuration, monthly premiums, deductibles, co-pays, co-insurance, ease of use, pain in the ass factors and branding’s repuational efforts. One area of particular interest of segmentation is the Silver market on the Exchange. There are three distinctive markets within the Silver band.
The Exchange and subsidy design create the first segment of the Silver market. All subsidies on the Exchange are based on allowing an individual to buy the second cheapest Silver plan on the Exchange for a percentage of their income. An individual who makes 150% of FPL is expected to pay 4% of their income for their policy. The federal tax credit subsidy pays the rest of the cost of the second cheapest Silver. Someone making 399% FPL is expected to pay up to 9.5% of their income for the policy with the feds topping off the remainder. If these individuals choose something cheaper such as the cheapest Silver or an inexpensive Bronze, they pocket the difference as the subsidy stays constant. As you can see, there is a strong incentive for insurers to offer at least a Silver plan that is either the cheapest two Silvers or very close to the subsidy cut-off.
This segment in a competitive market should see a cluster of plans that are at the subsidy line plus or minus a couple percentage points. These plans are the first segment. They tend to be very restrictive in all modifiable aspects. HMO’s with gatekeeper and strict authorization processes are likely to be here while open access PPO networks are unlikely to be in this segment. The networks will tend to be very narrow as the pricing model is Medicare plus a small kicker (Where Mayhew Insurance sells, the pricing on this segment is Medicare plus 3% to Medicare plus 8% depending on the insurance company) and insurance companies are avoiding the high cost providers if they can. These are the super narrow networks where the goal is to get a Silver plan that is either top 2 or really close to top 2 in pricing. They are aimed at people who are getting subsidies are extremely aware of every additional dollar they have to spend on monthly premiums. If we had a public option plus 5% scheme in place, it would fall into this segment.
The next segment is targeted at individuals who are receiving premiums but are not as cost sensitive. Here, choices or at least the illusion of choices matter more to how people choose their products. The pricing for provider reimbursement ranges from the Medicare plus a kicker to regular commercial rates. Plans are still more likely to be HMO and EPO instead of PPOs and the networks will be significantly broader but there will still be exclusions based on pricing. The referral and authorization process is likely a bit more relaxed than the narrowest and lowest cost products. Fewer things will need referrals.
The last segment is a bifuracted market segment. It is either for people who have high medical needs and know it and want no change to their option space or it is for people who are minimally dependent on subsidies and want to replicate employer based insurance. These plans tend to price at regular commercial rates to providers and there will be minimal network exclusions. The most common plan configuration is an open access PPO with rich out of network benefits. There is a deminimis at most primary care provider gatekeeping functionality and referrals are something that other people have to worry about.
The benefit configuration of deductibles, co-insurance and co-pays are probably similar in all three market segments as the qualification for Silver status only allows so much wiggle room for customization. Some plans may have a $50 specialist co-pay and 35% co-insurance while others might have a $20 specialist co-pay and a 50% co-insurance but there is not too much of a difference avaible. The major differences are the size of networks, and the gatekeeper requirements imposed upon the policy holder and their primary care provider.
These segments were haphazardly defined in 2014 as companies were mostly shooting blind on both what the risk pools looked like and what their competitors’ strategies are. 2014 is a successful beta testing year. I think the Silver segmentation will be much clearer in 2015 and very obvious in 2016 as more data and experience comes into play.