American Progressive Life & Health Insurance Company of New York has become the first company to withdraw from the New York State Health Exchange after failing to file a 2015 rate proposal.
The company, also known as Today’s Options of New York, operated in 37 counties across New York State, but only 384 people signed up for its plans [emphasis mine]under the first year of the Affordable Care Act….
Size matters a lot, and Today’s Options was too small to be even laughed at. Why is this a good business decision?
384 people are too few people for an insurance company to offer a commercial or commercial like product for two significant reasons. Either reason is a good enough reason for a company to get out of this market segment.
The first reason is that insurance companies are group size queens:
Actuaries and underwriters love large groups. The bigger the better. Small groups and individuals are almost impossible to accurately price. Big groups allow statistical approximations to approach population realities while the error bars on a small group are massive. Massive error bars make underwriters and actuaries cry…
A large group smooths out the random noise and makes the cost of covering the sick lower due to both lower administrative costs and lower variance costs.
384 people in a single risk pool is an inadequate risk pool unless there is massive and costly reinsurance on the back-end. At this point, a fully insured group of this size could see the risk pool blow up if there is one more drunk driver than projected, if there is one more conversation that ends in “Hold my beer and watch this”, if there is one more cancer diagnosis than projected. An unexpected $350,000 claim is a massive miss. A risk pool of 5,000 or even better 100,000 people in it can absorb a little claims noise far better than a risk pool of 384 people.
Secondly, preparation to file for a new plan year is expensive as hell. I was intimately involved in filing Mayhew Insurance’s 2015 options, and I would guess that this effort was at least 35 man years where most of those man years are not cheap man years. Our filing was complex. Filing a single basic plan design at different metal levels which is what it looks like Today’s Options did in 2014 is a simpler task but it will still eat up several man years to prepare a comprehensive filing.
Mayhew Insurance could afford to invest the time and manpower in the filings for two reasons. First, we have an enrollment base to cover the costs. Secondly, we’re historically a general services insurer and a long term chunk of the strategy is to be able to play in all levels of the market. Taking a short term loss may be acceptable. Today’s Options is fundamentally a Medicare Advantage company with low margins and it was attempting to make a quick play for a virgin market. Butting its collective head against the wall while losing money is not a good idea for a secondary line of business.
Since there were only 384 members with an allowable administrative overhead of 20% which has to cover everything, filing costs and regulatory compliance expenses most likely overwhelmed Today’s Options’ cost structure.
From a policy point of view, unpopular and comparatively expensive plans exiting the marketplace is a good thing in states with deep markets and significant participation. It sucks that 384 people will need to find new policies next but they are highly likely to get better and cheaper policies instead. Most insurers are using 2014 as a beta test year, and some insurers will figure out that the test failed, so we should expect to see insurers with minimal enrollment leave the markets.