Building a new health insurance company requires the builder to have deep pockets for two reasons. The first is that an insurer is required to have sufficient reserves to pay out worst case scenario claims even if the insurer collapses. That usually means the insurer needs to keep between six and nine months worth of premium revenue in cash or near cash. Secondly, building a plan is expensive as a fixed cost. For instance, any new insurer would need to fill my old position for a good twelve to eighteen months before the first payment from a customer was received. The insurer would need to hire the plumbers, the architects, underwriters, medical directors, legal, and regulatory compliance teams (ie the really expensive people at an insurance company). The core team to build out a compliant plan is independent of the projected enrollment.
And once membership is added to a plan, that core team can’t disband; they are the people who keep everything running reasonably smoothly. Fixed costs to operate are a bitch.
I was thinking about this as I saw a couple of recent start-ups and their cost structures:
The co-ops are true start-ups from scratch and their first year was rough if they could not get massive enrollment at fairly low premiums.
Eleven co-ops—Arches Health Plan in Utah, Colorado HealthOP, Community Health Alliance in Tennessee, Consumers Mutual Insurance of Michigan, Evergreen Health Cooperative in Maryland, Health Republic Insurance of Oregon, HealthyCT in Connecticut, Land of Lincoln Health in Illinois, Meritus Health Partners in Arizona, Minuteman Health in Massachusetts and Nevada Health CO-OP—had net loss-to-surplus ratios that were worse than CoOportunity’s….
Sutter Health Plus is in Northern California and it is an HMO that is being launched by a large hospital change. The hospital chain is attempting to become an integrated payer-provider with a picket fence around its operations instead of the castle wall that Kaiser uses:
Sutter Health Plus, the new in-house HMO at Sutter Health, lost $5.1 million in the third quarter, and $13.1 million cumulatively through Sept. 30, on $21.25 million in revenue, the Sacramento health system confirmed. Its first year of operational results began Jan. 1, 2014.
The fixed costs of building Sutter Health Plus is probably driving most of the loss as Sutter Health Plus is playing only in the employer sponsored market which is a far more predictable and healthier market than the Exchange markets. The Co-ops are getting hit with losses from starting up, building membership and usually taking on a very sick and costly population.