Renting, not buying membership

Cell phone companies will often engage in loss leader sales to get people on renewable multi-year contracts.  The logic is simple.  Once someone is on a contract, they are very unlikely to switch, so a short term loss and mediocre service will produce a long term customer and thus a long term revenue stream.  Insurance companies do the same thing.  They’ll aggressively price products to attract membership in the first year, and then jack up rates to actually profitable levels in the second and third year.  The bet is that most people will shrug their shoulders and stick around as the cost of switching insurers is high as it is painful and uncertain.  This is known as buying a market.

The Exchanges suggest that insurers can only rent markets, not buy them.  There are two interesting pieces of evidence for this assertion.  The first is that the PPACA exchanges had very unusual buyer behavior on the second time around.  Buyers in the first period actually went back online and looked around for new deals.  Roughly a third of all covered lives that had a 2014 policy and wanted a 2015 policy went back on line to look at their options.  Half of that population switched.  Switchers tend to be healthier on average than non-switchers, so a 15% switch rate from high cost/low value plans to low cost/higher value plans means the plans that lost membership lost a lot of their profit margin.  This is market discipline in action.

Secondly, there is an interesting tidbit from the Oregon rate requests for 2016 (all from ACA Signups ):

this handy BizJournals article by Elizabeth Hayes from a couple of weeks ago:

The numbers are in: It appears that Oregon consumers were fairly price sensitive when it came to choosing health plans this year.

LifeWise had the lowest rates, at $222 a month for a 40-year-old Portlander on a silver plan. Probably not coincidentally, it more than doubled its individual membership in plans that comply with Affordable Care Act guidelines.

As of March 31, LifeWise has nearly 37,000 members in ACA-compliant plans, up from 4,735 last year, according to the Oregon Insurance Division.

So Lifewise looks like it attempted to buy a decent chunk of the Oregon market last year with very low rates.  It was reasonably successful as its membership increased by 800% in a single year.  This shows that people are willing to change insurers.  However, Lifeline is also asking for a large price increase to cover their actual costs.  Other insurers in Oregon are requesting rate drops.  It looks like the low cost Silver plans from all of the major insurers are converging into a fairly narrow space once the price increases and price drops are approved.

This is predictable.  Low cost silvers are competing for cost conscious consumers, and they are creating a distinctive market 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…. and insurance companies are avoiding the high cost providers if they can.  They are aimed at people who are getting subsidies are extremely aware of every additional dollar they have to spend on monthly premiums.

Low cost Silvers from different insurers after two years of experience will start to look very similar.  They will be narrow networks and primary care physician requirements.  Insurers who deviate from this model will either get the entire population, including the very sick at fairly low premium levels or get very little membership as members move elsewhere.

I don’t think the Exchange markets are structured to enable insurers to use loss leaders to buy membership in most reasonably competitive markets.  Insurers can probably get away with that strategy in regions where there is only one or two other competitors and there is significant perceived quality differences, but that is not the dominant scenario right now.

28 replies
  1. 1
    Kylroy says:

    The takeaway for me on this is that the ACA enabled actual competition between plans on the basis of benefits offered, yes? And though it’s still a pain, I’d imagine it’s much easier for a single person to switch plans due to a price increase than, say, a 100-member company plan.

  2. 2
    Bobby Thomson says:

    Query whether at least some ACA satisfaction comes from people surfing unsustainable teaser rates.

  3. 3
    C.V. Danes says:

    Now, if we could only get this kind of competition in the employer provided health insurance market…

  4. 4
    Tommy says:

    @Kylroy: I am one of those single people and I changed plans this year. I got a better plan. Let me say that again, I got a better plan. It was a little bit of a pain in the ass too switch. I didn’t log the number of hours it took, but it did take hours both online and on the phone.

    But I work for myself and since Obamacare I’ve had a far superior plan saving me almost $100/month. I can’t complain that I have a better product for less money. I just won’t do it :)!

  5. 5
    Fair Economist says:

    A switch rate of about 1 in 6 would allow substantial rent collection from existing subscribers – that’s probably similar to the cellphone switch rate. I think the limit is that they can’t offer special deals to new customers.

  6. 6
    Tommy says:

    @C.V. Danes: I can’t begin to explain the satisfaction I had December of last year, jumping online, and knowing I had health care choices. I could keep the plan I had of course. Downgrade or upgrade. I have NO health issues but I decided to upgrade.

    Yes decided to pay more because I could afford to, but also because if I do get sick I want to have the best coverage possible.I had choices, freaking choices. That made me very happy.

  7. 7
    C.V. Danes says:

    @Tommy: Exactly. I’m hoping that people who are getting shafted by their employer-based plans will start looking at Obamacare and start demanding reforms for those, too.

  8. 8
    Richard Mayhew says:

    @Fair Economist: The switch rate on insurance is seldom more than 10% of the customer base, and is usually 3-4% in a given year.

    Most health insurers are fairly low margin (<4%) businesses. Switchers tend to have fairly low expenses as they don't need stability of network/care as they aren't under significant care, so they are the people whose premiums usually far outstrip their expenses, so they are the ones where profit is possible. A large switching pool means the insurers who lost the switchers lost any chance of profitability that year. A 16% switching pool is massive in this context.

  9. 9
    Tommy says:

    @C.V. Danes: I always worked for small firms, but we were always given the best plans around. I had Rolls- Royce coverage. Then I started working for myself and it was a nightmare. Terrible plans for a god awful large sums of money.

    Now that has changed 180 since the ACA. I so wish as you noted, people on terrible employer plans, go to the ACA and see what they can get. I am willing to bet they would be pleasantly surprised.

  10. 10
    Eric U. says:

    my employer chose to use obamacare as an excuse to screw all of us. Which doesn’t really surprise me much

  11. 11
    ruemara says:

    I’m on an ACA plan and it’s awful. I hate to say it but it’s unaffordable at my income with subsidy, and the coverage of meds and office visits leaves much to be desired. I’m surprised at the sheer lack of choices in CA at my level.

  12. 12
    Richard Mayhew says:

    @ruemara: what plan and roughly what income level? People who make between 200% and 300% FPL are in a fairly ugly spot as they aren’t making a ton of money, but the subsidies aren’t great.

  13. 13
    Tommy says:

    @ruemara: That sorry to hear that. I assume you have already done this, but let the state know what you are unhappy about. Maybe they will rework the plans. Or at least we can hope :).

  14. 14
    cahuenga says:


    I hear you. Better than nothing but unfortunately ACA does exactly nothing to bring prices in line with other developed countries.

  15. 15
    ruemara says:

    @Richard Mayhew: silver. I was guided towards it before due to my health problems, but the subsidy was I suppose generous enough but still leaves me with a nearly $200 bill every month. I JUST paid the 18th of April and I’m sitting here with a bill due on the first of May that I can’t afford at all. Bullshit. I hate Anthem.

  16. 16
    Tommy says:


    but unfortunately ACA does exactly nothing to bring prices in line with other developed countries.

    Agreed there. I have a few health care related clients. I may only be doing their e-Commerce site, but I have a habit from my ad agency days where I needed to understand my client’s business, so rarely does research come across my desk where I don’t read it even if I am not getting paid for it.

    The dollars we pay in health care costs compared to other “first world” nations is so off the chart it is almost hard to put it in a chart. It is so out of whack I don’t see how we ever correct it. We just have to try to keep yearly increases to low single digits.

    At least for us that would be a huge start, since most years health costs are going up at around 13% annual. The ACA has stopped that, but it has not rolled by the over-all cost.

  17. 17
    dr. luba says:

    I got a COBRA plan in 1997, and switched it to an individual policy in 1998, and didn’t switch again until the ACA forced me to. Why? My needs were covered, and the thought of switching–paperwork, preexisting conditions, horror stories, etc.–kept me from doing so. Also, too–I like my PCP.

    I got a plan similar to the one I’d had. Changed it this year after shopping around (HMO–> HMO + HSA), because they increased the premium by 10%. And I will change again next year, perhaps to a different company altogether, as my PCP is retiring.

    The ACA hasn’t saved me much money–I don’t qualify for subsidies–but it has made comparison shopping reasonable, and thanks to Richard and this blog, I now really understand how my insurance works and what to look for (and look out for).

  18. 18
    VOR says:

    There is the case of PreferredOne in the 2014 Minnesota exchange, MNsure. I know Richard has previously blogged about this. As this article on states “PreferredOne was one of the smallest plans on the health care exchange, and it offered the lowest prices in the market, helping Minnesota achieve some of the lowest average rates in the nation. When company officials realized they weren’t making enough money, though, they decided to bolt.”

  19. 19
    narya says:

    ACA can even be helpful to employers! I work for a CHC that has a substantial number of employees who are living with HIV–which meant we were uninsurable as an agency before ACA. (We were self-insured, which was expensive and unpredictable.) January 1 of this year we started w/ BC/BS. It still has its drawbacks (large deductible, in my case) but still overall a better deal for most employees and the agency. (Our company prices health insurance for employees on a sliding scale–lower-paid employees pay nothing or relatively little for the HMO plan, while more-highly-compensated employees pay something. Still less than when we were self-insured, though!)

  20. 20
    Brachiator says:

    @Richard Mayhew: So, is it reasonable to say that in Oregon at least, consumers are able to understand plan options and make informed choices? If so, this is pretty good, it seems to me.

    Also, there is not a penalty for changing plans, right? This is superior to cellphone plans, which are designed to tie consumers down for at least 2 years.

  21. 21
    Brachiator says:


    Better than nothing but unfortunately ACA does exactly nothing to bring prices in line with other developed countries

    I don’t know that this should be a goal of ACA, certainly not a primary goal. And you cannot expect ACA to have a huge impact on prices in only one year.

  22. 22
    C.V. Danes says:

    @Tommy: I went on last year, and comparable coverage was about the same cost, since, because my employer provides health care I don’t qualify for subsidies. However, now that we have been forced onto high deductible plans, the overall cost for an ACA plan might actually be cheaper. I may very well jump on board next year.

    Oh, and my company is a multinational IT company with about 250k employees. Ridiculous that can’t provide better health care.

  23. 23

    @Brachiator: We’re at the Granny Smith to Red Delicious stage of comparison for health plans on Exchange. As long as the change occurs during either the general open enrollment or during a special qualifying life event enrollment period, switching is free.

    @Brachiator: There is minor pricing pressure as the Exchanges are focused on low cost providers, so very high cost providers are getting excluded. The exchanges are only driving 5% at most of US healthcare spend, so the pressure is slightly more than a warm spring breeze and not a gale force wind.

  24. 24
    Brachiator says:

    @richard mayhew: Yeah, I knew that switching was supposed to be free, but I wasn’t sure whether in Oregon or elsewhere, there were hidden or extra fees slipping in.

    And again, the other thing I find interesting is that some people are apparently able to make informed choices. Of course, I don’t know how good any customer service might be.

    On the other hand, I heard a lot of problems that people had in California getting this state’s version of Affordable Care.

  25. 25
    cahuenga says:


    Understood. However, there is no arguing that cost is the root of the problem and subsidies are, at best, a weak attempt at glossing over a steaming pile.

  26. 26
    Adam Lang says:

    California definitely has its share of problems. A friend of mine, for example, who is signed up for Blue Shield because she’s had it before as an employer-based plan and it worked out well for her, and because she’s had Anthem and it turned out to be a full-time job correcting their errors.

    But so far we’ve called 77 local doctors from their list, and we have a list of exactly six that are accepting new patients from the exchange plans, and those are uniformly the ones that have gotten awful reviews on Yelp or one of the rate-my-MD sites (and none of them specialize in women’s health, and they’re all men). I wonder, when does a ‘narrow network’ become a ‘nonexistent network’?

  27. 27
    grondo says:

    Prepaid – just sayin’…

  28. 28

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