Competition and self-inflicted wounds on Exchange

The Urban Institute last week put out a very interesting report.  They looked into why United Healthcare is losing money hand over fist on the Exchanges and then examined if this was a matter of Exchange structure or a matter of United Healthcare’s strategy.

TLDR: United Healthcare is losing money because they did not think their strategy through.  Sucks to be them but this is not a systemic Exchange problem.

United offered marketplace based coverage in 36 of the 81 study regions in 2015, but, it offered the lowest-cost silver plan in only four and was the second lowest-cost silver insurer in only another four.

We know that the Exchanges are an extremely cost sensitive market. As I pointed out in the summer of 2014, the market is a very segmented market:

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…. 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 … They are aimed at people who are getting subsidies are extremely aware of every additional dollar they have to spend on monthly premiums.

I would bet that United did fairly well in the eight markets where they had either the 1st or 2nd Silver. They’re getting killed in markets where their products are not price competitive.

In the 48 regions in which it participates in 2016, United offers the lowest-cost silver plan in only four and is the second-lowest-cost insurer in 11 others. Although United has entered over half of the 81 rating regions we analyze, their premiums are generally high relative to other competitors, presumably to mitigate risk and to compensate for what may be a broader-than-average provider network…. United’s premiums in particular have generally been substantially higher than their competitors, and therefore it is unlikely that they were playing a critical role in inducing the competitive behavior witnessed among the other insurers.

Again, United will probably do fairly well in the fifteen markets where they are one of the best priced Silver plans.  They’ll get creamed everywhere else.

United Healthcare is offering a product in my region.  The network for their least expensive Silver (which is 10% more expensive than the benchmark Silver) is significantly broader than the networks of two competitors low price Silver options.  The network includes the leading academic medical centers and all of the regional specialty hospitals.  The provider network for PCP and specialists are also larger than typical for this region’s Exchange plans.  This tells us a couple of very important points:

  1. United Healthcare is paying Medicare plus a lot or standard commercial rates for their Exchange product in the area
  2. Since the Exchanges are price sensitive markets, UHC does not have a very large membership
  3. The UHC membership is most likely sicker than the typical Exchange member
  4. There are very few low cost members in the UHC risk pool (as they would have self-selected to a benchmark plan)
  5. Risk adjustment will have UHC be a net RA winner but since they are using a lot of services at high cost providers, they are still on net losing money despite the RA cash flow.

Broad networks are magnets for very sick people.  They want access to everything as they already have pre-established relationships.  United Healthcare in my region is getting a good proportion of those very sick individuals.  Lots of sick individuals means they are using lots of services.  Given that UHC has only a broad network plan, that means the average rate paid to providers will be very high, so lots of services at a high rate means a very high medical expense ratio which means they’re probably going to lose money in my region.  The Urban Institute brief shows that the companies that are doing well are the ones that have significant local knowledge and/or a history of offering products based on very low cost provider networks.

Competition is a bitch, and UHC’s decisions to offer fairly generic, broad networks without incorprorating local knowledge was a bad decision on their part.


15 replies
  1. 1
    lowercase steve says:

    Any comment on this piece making the rounds?

    I know, I know:

    1. WSJ
    2. What is the counter factual?
    3. The exchanges are a relatively small part of the health insurance market
    4. What is this weighting they are using?
    5. Yeah, some young healthy people are worse off having to buy insurance/pay the penalty
    6. How much is the premium increase associated with those 7.5 million who paid the penalty rather than joined the exchange?
    7. I am guessing we expect some stabilization on the exchanges once insurers figure out how to price in this new market?

    Anything else?

  2. 2

    @lowercase steve: it is the WSJ op-ed page, I’m not paying to read that crap.

  3. 3
    C.V. Danes says:

    Competition is a bitch, and UHC’s decisions to offer fairly generic, broad networks without incorprorating local knowledge was a bad decision on their part.

    Be careful of the Rube Goldberg solution you intensely lobbied Congress for. You just might get it…

  4. 4
    Prescott Cactus says:


    When United Healthcare or other provider submits their bid for publication is it a “sealed bid” which can’t be changed or adjusted? Do they just have to hope and pray it’s in the strike zone?

  5. 5
    Calouste says:

    So extrapolating a bit here:

    Most people don’t have big health issues and they will go for the cheapest possible plan because they don’t expect to use a lot of it. These plans are money makers for the insurance companies because they relatively don’t have to pay out much.

    People with health issues will go for the broader, more expansive plans, because they need and/or already use more specialized care that is not in network in the cheaper plans. Because they use more care, insurance companies lose money on this particular risk pool.

    So what most likely is going to happen is that insurers drop the broader, more expansive plans and the more specialized care is now out of network for everyone. Which means people can’t afford the care they need and the more specialized care centers might have to shut down because they don’t get enough patients any more.

  6. 6

    @Calouste: That is about 10 extrapolations too far for major specialty centers shutting down as it would mean Medicare and employer sponsored coverage drops those centers from their networks.

    Remember Exchange is 4% of the US population, and even less % of total medical spend (as Exchange is under 65 and 65 gets expensive fast because old =sick)

    What would happen in an equilibirum of narrow networks is that the narrow networks would all pay out of network prices to specialty centers but charge in network cost-sharing to members who had high end needs as they must pay for medically necessary care.

  7. 7

    @Richard Mayhew: Note to self — do not engage Megan McCardle in discussion on twitter as she is convinced she knows the TRUTH and forget what subject matter experts have to say about anything that goes against her TRUTH

  8. 8
    p.a. says:

    UHC issues will retroactively be Hillary’s fault in Jan. 2017.

  9. 9
    p.a. says:

    @Richard Mayhew: Are you a slow learner? ;-) Or exceptionally optimistic?

  10. 10

    @Prescott Cactus: Depends on the state.

    For states that are on the process is multifold (and I am going to miss a few steps as I am not working Exchange right now)

    a) Declaration of intent to participate for following year
    b) Initial application for a qualified health plan
    1) Network adequacy met
    2) Plan design (PPO, HMO, EPO etc)
    3) Benefit design
    4) Band level
    c) Regulators send back comments
    d) Insurers respond to comments and tweak proposal
    e) Insurers submit initial rate request
    f) Regulators send back comments
    g) Insurers submit final rate requests and any other supplemental information
    h) Final plan approval and operational details are then sent back and forth to

    It is not quite a black box but Mayhew Insurance does not know what Purple Power networks look like, we cna guess based on requested rates plus sleuthing on the ground but we don’t know in June what their next year network looks like.

  11. 11

    @p.a.: Optimistic, as I’ve have several good long productive conversations on and off-line with conservative leaning healthcare journalists to walk them through complicated points before. And at the end, they got why something was happening as non-nefarious.

    Megan’s argument is UHC by definition can’t have been stupid and their actuaries (or in my opinion, their chief marketing folks) can’t be wrong…

    Looking at revealed preferences and strategic interaction, they’ were wrong in their guess on the market.

  12. 12

    @Richard Mayhew: and also by definition, PPACA is a rickety contraption that is about to fail any time now ….

    stupid me for engaging

  13. 13
    Prescott Cactus says:

    @Richard Mayhew:

    stupid me for engaging

    I hear that often from my bride. Thanks for the knowledge boost !

  14. 14
    J R in WV says:

    Isn’t United Healthcare the former slave of the current Florida Governor, Rick Scott? And weren’t they convicted of Medicare fraud under his wise and benevolent guidance? And fined something like $4 Billion (with a B!) for their evil health care fraud?

    Are any of those managers still in charge of anything at United?

    Look, nothing but questions, how can that be?

    Being an elderly retired person, I may misremembrr all of this.

    Thanks, Richard, for your patience with me and my hysteria~!

  15. 15
    Prescott Cactus says:

    @J R in WV:

    Being an elderly retired person, I may misremembrr all of this.

    I’m with you J R.

    It was Hospital Corp of America and $2 Billion (with a B!). From the wikipedia;

    On March 19, 1997, investigators from the FBI, the Internal Revenue Service and the Department of Health and Human Services served search warrants at Columbia/HCA facilities in El Paso and on dozens of doctors with suspected ties to the company.[29] Eight days after the initial raid, Scott signed his last SEC report as a hospital executive.[30] Four months later the board of directors pressured Scott to resign as Chairman and CEO.[31] He was paid $9.88 million in a settlement, and left owning 10 million shares of stock worth over $350 million.

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