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:
- United Healthcare is paying Medicare plus a lot or standard commercial rates for their Exchange product in the area
- Since the Exchanges are price sensitive markets, UHC does not have a very large membership
- The UHC membership is most likely sicker than the typical Exchange member
- There are very few low cost members in the UHC risk pool (as they would have self-selected to a benchmark plan)
- 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.