Withdrawal for a too small company

An insurer in New York state that offered plans for 2014 will not be on the 2015 Exchange:

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….

h/t ACA Signups

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.

40 replies
  1. 1
    Keith G says:

    Would it be part of a smart insurance shopping strategy for consumers to find out the number of enrollees a company has? If so, where would one find that information? What level of importance should one attach to such a number?

  2. 2
    PaulW says:

    Secondly, preparation to file for a new plan year is expensive as hell.

    Is there any way to simplify the preparation/filing process for a company to reduce the costs while still ensuring quality coverage?

  3. 3
    Richard Mayhew says:

    The biggest expense of the filing is the business process and decision making as to what to file with the relevant regulatory entities. Do we offer a narrow EPO in the West counties? What deductibles? Do we need to include West Central Medical Center in the narrow or since they are asking for standard rate plus 14%, can we keep them out. What does that do to pricing? Will people buy this product?

    Once those questions are answered, the filings themselves are reasonably cheap although a pain in the ass for the grunts who are doing the work as some senior management MBA type wants to keep fiddling with criteria until 3 hours before the submission deadline.

  4. 4
    rikyrah says:

    thanks for another informative post

  5. 5
    JPL says:

    Richard, This is off topic but can ACA survive if the courts rule against subsidies on the federal exchanges? I can imagine a scenario where most northern states find a fix and southern states refuse. It seems to me that since the southern states populace seem to be less healthy, this would be good news for the insurance companies.

  6. 6
    gratuitous says:

    As for most people, I suspect that actuarial, risk management and ancillary stuff just makes my eyes glaze over. But even I could follow this post, and make sense of it. Good job.

    I will now look forward to 384 little commercials from our good friends the Koch Brothers and their sweatshop at John Birch Society Central about these people “losing” their insurance because of Obamacare. It should be sufficient to quote the paragraph above that begins “384 people in a single risk pool is an inadequate risk pool . . .”

  7. 7
    Senyordave says:

    I worked as a pricing actuary for several insurers, and I can confirm that everything Mr. Mayhew says is correct, at least from my experience. To price an insurance product, you need a decent size pool of policyholders. With the exception of a very low risk line of insurance such as personal auto physical damage, no company wants to take the risk of writing insurance with a potential customer base of 400. The risk factor is simply too high, especially since profits have a ceiling, but losses are unlimited (or limited by a reinsurance cover, but that usually means you’ve already lost your shirt). Plus the overhead costs would be crippling.

  8. 8

    So how many insurers can a market as big as New York support? Are we looking at situation where we are going to see a race to an oligopoly at the bottom?

  9. 9
    Schlemizel says:

    Maybe I am not looking at this correctly but why wouldn’t an insurance company look at the ‘marginal’ risk? If Schlemizel Health had 20,000 clients already enrolled via company provided or individual purchases wouldn’t the addition of 384 more people only be a small marginal increase in risk? Why would a company not evaluate the total risk when adding business instead of considering each pool separately?

  10. 10
    Omnes Omnibus (the first of his name) says:

    @The Raven on the Hill:

    Are we looking at situation where we are going to see a race to an oligopoly at the bottom?

    Does it really matter if the insurance being provided meets the federal standards for pricing and quality?

  11. 11
    Yatsuno says:

    @Omnes Omnibus (the first of his name): What is single payer if not a monopoly by the state?

  12. 12

    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.

    Another compelling argument for national health insurance, like civilized countries have.
    ~

  13. 13
    Richard Mayhew says:

    @The Raven on the Hill: A lot, if the market is fragmented, probably four or five insurers in most urban non NYC counties is how things will shake out, and 2 to 4 in rural counties and who the hell knows in NYC.

  14. 14
    MomSense says:

    @ifthethunderdontgetya™³²®©:

    There are many different models for health care in “civilized” countries. They are not all singe payer.

  15. 15
    Violet says:

    @Omnes Omnibus (the first of his name): Gasp! Are you suggesting there should be regulation of a for-profit company? By the government? Why do you hate capitalism and the baby Jesus?

  16. 16
    300baud says:

    I love this article. Could you say what those 35 person-years includes? Just roughly, at the level of “5 years of task X” or “3 years from person Y”.

  17. 17
    aimai says:

    Long article in the Boston Globe today about “sticker shock” for people enrolled in the ACA because there is an “auto-enroll” feature which will automatically re-enroll you but which somehow will be bad for the consumer because they should really shop around every year and make sure that they know what their subsidies will be? I realized halfway through the article that I didn’t trust the reporter because among other things he implied at the very start that people on Employer Insurance don’t suffer from sticker shock or get their policies changed every year. Also he didn’t explain anything about how or why policies would change cost.

  18. 18
    Richard Mayhew says:

    @aimai: That Boston Globe article is useful, I’ll have a full mechanics post on that this week.

  19. 19
    WereBear says:

    I do our surveys and one of the hardest concepts to get across is how, with small groups, you really don’t know anything; that one person who is an outlier will skew the results unbelievably.

  20. 20
    Roger Moore says:

    @WereBear:
    I think that shows people don’t really understand how insurance works. Anyone who understands the basic concept of risk pooling should be able to get that point.

  21. 21
    Violet says:

    I expect we’ll be seeing a lot more of this:

    Mississippi Gov. Phil Bryant (R) blamed President Barack Obama for a reported increase in uninsured Mississipians. The problem is, Bryant didn’t acknowledge that he’s been a staunch opponent of expanding Medicaid under Obamacare and refused to encourage enrolling in private coverage through Healthcare.gov.

    Bryant directed his blame at Obama in response to a question about a WalletHub study that showed an increase in the percentage of uninsured Mississippians. The study found that the uninsured rate increased by 3.34 percentage points to 21.46 percent of Mississippi’s population, according to the Northeast Mississippi Daily Journal.

    “If statistics show that the ill-conceived and so-called Affordable Care Act is resulting in higher rates of uninsured people in Mississippi, I’d say that’s yet another example of a broken promise from Barack Obama,” Bryant said.

    An estimated 137,800 people in Mississippi were left uncovered by health insurance because the state did not expand Medicaid.

    Rural hospitals close because a state didn’t expand Medicaid? Blame Obamacare! More people uninsured? Blame President Obama and Obamacare! I hope the Democrats have some plan to deal with this stuff but I’m not holding my breath.

  22. 22
    JGabriel says:

    While we’re on the subject of healthcare:

    “On the advice of legal experts, the House action will focus on [the President’s] decision to extend — twice — the deadline to institute the employer mandate in his health care law. We believe this targeted lawsuit offers the best chance of success,” [John Boehner] wrote in an op-ed for USA Today published online Sunday.

    He added: “The fact we agree with a change that should have been made in law makes this case clearer to the court.”

    […]

    “I oppose the employer mandate in the president’s health care law. The House of Representatives has voted to delay or eliminate it (and we will do so again if we prevail in court),” he wrote. “But it is the letter of the law that was passed by Congress and signed by President Obama. He simply cannot unilaterally rewrite it.”

    Since Boehner is stating that he (and the GOP in general) agrees with the delay Obama implemented in the ACA’s employer mandate, doesn’t this constitute an admission of no harm, and therefore undermine whatever standing Boehner claims he has to bring the suit?

  23. 23
    J R in WV says:

    Insurance company withdraws from ACA coverage, Obamacare Fails Again!

    So sad. So dumb.

  24. 24
    big ole hound says:

    Just as an aside. The uninsured have dropped so far (I have forgotten the numbers) that in CA the ERs are reducing staff and beds due to lack of patients that used to show up for a runny nose, plus under the ACA the feds no longer reimburse hospitals for treating the uninsured with non-emergencies. Here in CA they are counseled into the exchanges and referred to primary care Docs. The whole system seems to be working as intended where we have little GOP obstruction. Go figure

  25. 25
    Mnemosyne says:

    @aimai:

    people on Employer Insurance don’t suffer from sticker shock or get their policies changed every year

    I just got a letter from the Giant Evil Corporation saying that I will either need to switch plans or switch providers next year, because they are no longer going to allow sole practitioners to act as “HMOs” for the purposes of our plan. It’s a pain in the ass either way, because if I stick with my doctor and switch to the PPO plan, my prescriptions are going to cost a LOT more out of pocket (right now, I only have to pay a co-pay). If I decide to keep my inexpensive prescriptions, I have to change doctors. I’m not super-thrilled with my doctor right now, so I can’t make up my mind.

  26. 26
    dmsilev says:

    @JGabriel: The point of that lawsuit isn’t to win. It’s to show the GOP base that the Republicans are Fighting Against Obama. The suit won’t get tossed until after the election, by which point it will have served its purpose already.

  27. 27
    Roger Moore says:

    @JGabriel:
    As I understand it, the argument is that the Republicans may have wanted a delay, but they wanted a legislated delay. If they can’t get their preferences enacted in legislation, the President has no right to implement them by executive fiat. It’s still a weak argument, but at least it’s making some kind of attempt to acknowledge and deal with the Republicans’ own interest in delay rather than pretending they weren’t getting what they wanted all along.

  28. 28
    JGabriel says:

    @dmsilev:

    The point of that lawsuit isn’t to win. It’s to show the GOP base that the Republicans are Fighting Against Obama. The suit won’t get tossed until after the election, by which point it will have served its purpose already.

    Of course. I guess my point is that you’d think Boehner would at least keep up the pretense of having standing, instead of publishing fodder for the White House to get the suit tossed at the first hearing. Kind of a blunder, isn’t it?

    @Roger Moore:

    As I understand it, the argument is that the Republicans may have wanted a delay, but they wanted a legislated delay. If they can’t get their preferences enacted in legislation, the President has no right to implement them by executive fiat.

    They didn’t want a delay at all. They wanted the mandate to fail and use it as a political issue. I don’t think you get to sue because harms you wanted to happen to others are circumvented.

  29. 29
    raven says:

    @JGabriel: You can sue for whatever you want. Win, not so much.

  30. 30
    MomSense says:

    @dmsilev:

    Aside from trying to whip up enthusiasm by demonstrating how they are fighting Obama, it is a way to identify supporters and raise money from them. Sign this pledge/letter/manifesto saying you support Speaker Boehner and the Republican efforts to fight the bad bad bad bad things the Kenyan Muslim Usurper is trying to do to our country. Once they sign then they get the fundraising appeals.

    Dems do this too except it is for things like supporting access to reproductive health, raising the minimum wage, etc.

  31. 31
  32. 32
    gene108 says:

    @Roger Moore:

    I think that shows people don’t really understand how insurance works. Anyone who understands the basic concept of risk pooling should be able to get that point.

    I think the whole notion of everyone pays a little into the system and the net result will be enough money to do great things died in the 1970’s and 1980’s.

    People no longer understand or care or are actively belligerent to the idea of shared sacrifice.

  33. 33
    Patricia Kayden says:

    @Violet: Wow. Interesting what certain people will say with a straight face. I hope that there is some pushback from the Democrats in Mississippi even though they’re powerless in such a brightly red state.

  34. 34
    Patricia Kayden says:

    @big ole hound: Great to hear.

  35. 35
    Roger Moore says:

    OT: The Fourth Circuit has struck down gay marriage bans on appeal. The ruling affects the Virginias and Carolinas. That makes them (AFAIK) the second Appeals Court to do so after the Tenth Circuit.

  36. 36
    Roger Moore says:

    @Patricia Kayden:

    I hope that there is some pushback from the Democrats in Mississippi even though they’re powerless in such a brightly red state.

    There’s some vague hope in Mississippi. Their population is the largest percent African American of any state, which gives the Democrats a solid base to work from. If the Republicans continue to piss all over poor whites, there’s some hope that the Democrats can pick up disaffected Republicans and win some elections. It provides the Democrats with the best chance they’re likely to get.

  37. 37
    Davis X. Machina says:

    @gene108:

    “Shared sacrifice” today means a whole lot of people who come together with the idea that you other guys should sacrifice.

    It’s hard to do public policy in an environment where one of the major parties doesn’t believe that the word ‘public’ refers to a real thing…

  38. 38
    flukebucket says:

    @JGabriel: Forget about it Jake. It is Mississippi.

  39. 39
    2liberal says:

    @Yatsuno:

    What is single payer if not a monopoly by the state?

    single payer would not be an unregulated monopoly ; if it is single payer and a public option it would not be profit-driven

  40. 40
    Mnemosyne says:

    @2liberal:

    single payer would not be an unregulated monopoly

    Obamacare isn’t unregulated — as conservatives keep complaining, there are thousands of pages of regulations that make up PPACA. So even if some states did end up with a monopoly, it would be impossible for it to be unregulated unless PPACA/Obamacare is repealed first.

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