Networks and state line selling

Networks are hard for insurers to build.  They are easy to build when an insurer is operating in an area where it is already covering a large population base. A decent network that offers decent access at a reasonable price is very hard to build when an insurer is going into a new area.  This is critical when we think about why insurers have not scrambled to go to Maine or Georgia which allow for out of state insurers to come into the state with far less local regulatory approval.  Networks are tough.

The fundamental leverage dispute in a network negotiation is one of quantity versus price.  Insurers have leverage against providers when the insurer can credibly promise to direct a large number of covered lives to or from a particular provider.  Providers have leverage when they don’t think that the insurer is bringing a lot of members.  An insurer with large market share should be able to get a better price than an insurer that has very little local membership.  This is a problem when an insurer is looking to expand out of its home base.  There are a couple of options.  The first is to slowly blob from a central core by adding providers and members in roughly the same direction at the same time.  Organic growth can work as the marginal provider who the network expansion team is talking with sees the environment slowly changing so jumping in or out is no big deal. However non-organic “jump” growth is tougher from a network perspective.

There are a couple of ways a non-core area network can be built.  The cheapest way is to build a network organically.  The problem is that this is a slow build and it is likely to have a fairly small network initially as a lot of providers won’t believe that there is a large enough number of covered lives to make dealing with yet another insurance company worthwhile at a given rate.  The other major method is to rent a network from either another insurer or from one of the network bundlers.  These networks can be fairly broad and will be widely accepted by providers but there are severe limitations.  The first is that these networks tend to be expensive as they tend to pay the providers at a fairly high level and also charge a fairly high administrative fee.  The second is that the contractual restrictions of a rental network means the insurer can do far less utilization and cost control slicing and dicing in the future.

Why does this all matter for the question of selling across state lines as a policy panacea?

Let’s pretend that Mayhew Insurance is based in Providence, Rhode Island with a single license to sell in Rhode Island.  Let’s also pretend that the Big Idea Geniuses forgot their Dunkins this morning and decide that they want us to sell in Maine next year for the Exchange market.

The Mayhew Insurance Exchange network is centered in Rhode Island.  Since the state is tiny and there is a world class medical center 45 minutes to the north of capital, the network contains a significant number of doctors and hospitals in Massachusetts as well as a decent number of docs in the Nutmeg state.  However the network starts to fade to random and isolated samples north of the Charles River.  A few contracted providers have offices on the South Shore and the North Shore so their North Shore office is in network but no one ever goes there from Rhode Island.

Maine may initially have half a dozen random providers in network because they are branch offices of a Boston based hospital.  Everything else has to be built from scratch.  If Mayhew Insurance wants to compete on Exchange in  Maine, they need to have a competitively priced product which means a low cost network.  The former game of designing a high cost network that appeals only to very health people so that no claims needed to be paid goes out the window due to risk adjustment.  Yet Mayhew Insurance has no current membership in Maine and its Exchange market is reasonably competitive already. There is not a huge gap to jump into.

The network choices are to either build up slowly and get slaughtered in the first year as there is only a barebones network that is only attractive to very healthy people who need qualifying coverage that they don’t use and all the revenue is lost via risk adjustment or to build a decent size network by paying above current market rates to make it worth the providers’ time and effort to add yet another insurer and their paperwork/requirements to their pile of problems with an uncertainty that Mayhew Insurance will actually get anyone to sign up.  From there Mayhew Insurance could either price at an actuarial fair rate and attract only sick people with the hope that risk adjustment is sufficient to get close to break even or engage in a one to two year loss leader strategy.  The loss leader strategy is simple, Mayhew Insurance would commit to losing $10 to $20 per member per month in order to get a lot of members.  From there the new big member pool would be used to negotiate new contracts with new providers at lower rates because there is now a credible leverage of membership and volume to get decent pricing.

This all makes sense in an isolated fashion.

However if there is a large, well capitalized insurer in the state already that has decent brand loyalty they have a strong interest in minimizing their competition because that undercuts their pricing advantage.  They could afford to cut their pricing by the same margin as Mayhew’s loss leader strategy and minimize lost membership.

So there is a chicken or the egg problem with insurers expanding out of their home bases.  Insurers need membership to get good pricing on their networks but they need good pricing on their networks to get membership.  Dropping regulatory barriers to entry by encouraging a credit card-esque race to the bottom and enriching the state of South Dakota won’t attract new insurers into markets that are not next to home bases.

16 replies
  1. 1
    BGinCHI says:

    So, basically this?:

    1. Repeal Obamacare
    2. Allow health insurance purchasing across state lines.
    3. ????
    4. Profit + Lower Costs + More Freedoms!!!

  2. 2
    Bartholomew says:

    Obamacare is an amazing accomplishment, and the wonkery is good, Richard, thank you. I don’t understand the subject well enough … but it is clear the messaging is not uniformly getting out. Next time it might make more sense to Occupy the Media, the actual source of so much confusion and disunion. I am completely serious about this.

    So much of our problems are coming from the public being told different information, so that we can’t really get on the same page.

    Elizabeth Warren on Hillary Clinton (2004 interview with Bill Moyers)

  3. 3

    @BGinCHI: Damn it, you changed the template on the ultimate business model, but yes, something like that.

  4. 4
    japa21 says:

    This is what I do for a living and Richard is right, building a network is extremely difficult.
    I work for one of those rental networks.

    Recently, a rather large insurer came to us to expand our network in a state where they do not want to go through the trouble of building a network from scratch. They are currently using another network and wanted to see what we could offer.

    There is little doubt that providers, if they knew what insurer we were working with, would be happy to sign on with us. Unfortunately, for legal reasons, we could not mention their name. As a result, those we could get wanted exorbitant reimbursement and most felt we couldn’t bring the volume necessary for them to even sign on.

    The issue of reimbursement is difficult. I have worked with many large facilities that complain all the time about the reimbursement they are getting from the biggies (specially the Blues) but that they don’t have much choice as they control a lion’s share of the market. So they use that as an argument as to why they can’t give us a better deal.

    The counter argument, which they seldom seem to understand, is that the only way other insurers are going to be able to eat into that market share is by getting better rates so that they can compete on a more level playing field. Not asking for identical rates but something close. Instead, they keep plodding along under the thumb of the biggest stick in the area, rather than seeing what they can do to shorten the stick.

  5. 5
    laura says:

    Dispute resolution nightmare:
    I’m in California and buy what appears to be an affordable plan from Arkansas.
    A service includes an out of network service provider and I end up with a bill for service that I could not anticipate – or afford.
    Am I forced to arbitrate or litigate? If so, in California or Arkansas? Federal or state court? Arkansas, California or some others state’s law? What if Arkansas has tort reform and I’m barred from redress? What, if anything can my insurance commissioner do to help?

    I’m always suspicious that cross state markets are as rigged as a county fair midway.

  6. 6
    Scamp Dog says:

    I always figured that the goal was a regulatory race to the bottom, but I hadn’t thought about the practicality of operating an insurer. Would an insurance company be able to set up a nominal headquarters in, say, Mississippi and get out from under unfortunate regulations that require them to treat customers decently and cover health care expenses?

  7. 7
    dr. bloor says:


    There is little doubt that providers, if they knew what insurer we were working with, would be happy to sign on with us. Unfortunately, for legal reasons, we could not mention their name. As a result, those we could get wanted exorbitant reimbursement and most felt we couldn’t bring the volume necessary for them to even sign on.

    I’ve always found this to be a little weird.

    “Dr. Bloor, we’d like you to join our network.”

    “OK, what kind of traffic can I expect if I sign on?”

    “I’m sorry, we can’t tell you.”

    “Um, can you tell me what you pay for CPT 90791, 90834 and 96118?”

    “Nope, sorry.”

    “OK, then what kind of paperwork is involved for initially authorizing testing and treatment, and how often will I have to fill out updates for continued authorization?

    “Sorry, can’t tell you.”

    “Okie doke. Nice talking with you.”

  8. 8
    japa21 says:

    @dr. bloor: Actually, on the second, we could do that. Because we have several different payers who use our network, the third is more problematic, as they can have their own policies, although we are pretty strict about what we let a payer get away with.

    On the first one, we could give an idea of covered lives, etc., based on the clients we already have, we just can’t mention who a potential client may be. After all, if the client choses not to use us, we would be in trouble with the providers.

  9. 9
    dr. bloor says:

    @japa21: Understood–I’ve actually gotten bits and pieces from some insurers before choosing to plow through the paperwork, but between legal constraints, proprietary info and straightforward market uncertainty, it’s always felt a little like playing Monty Python’s “Cheese Shoppe.”

  10. 10
    japa21 says:

    @dr. bloor: Actually, I have been on both sides of the fence, so I do realize how frustrating it is on the providers.

    Interesting tidbit which can illustrate how frustrating it is on my current side of the fence. Marketing departments have a tendency to oversell in all industries. It is not uncommon for the marketing department to come to us and say, hey we have a new client who needs this hospital in our network and these three docs. We told them it would not be a problem.

    Of course, because we have an exclusive contract with another hospital in the same area where we can’t contract the hospital marketing is talking about we have a little problem. We tell marketing we can’t do and they whine and moan and insist we can contract the new hospital.

    Or, they won’t tell us who a potential client is or the size, so all we can tell a provider is we may have a new client, but provide no other information because we don’t even know what the information is.

    And back to the topic of the post, we had two exchange carriers contract with us for out of area providers. These were co-ops who happened to have a lot of insured’s live in areas where going to providers across the state lines was more convenient for them. Because our rates were above the norm for a normal large carrier, they took a beating. One is no longer in business.

  11. 11
    Botsplainer, Cryptofascist Tool of the Oppressor Class says:

    The alternative:

    “Doc, we want you to join our network. Guaranteed pay at your billing rate, whatever it is. As many patients as you can handle, simply enter the bill”

    And then drag your feet or don’t pay at all.

  12. 12
    mb says:

    One thing that is always elided in this is that insurance sales across state lines don’t need to be “allowed” by the big, bad Federal gov’t, they would have to be “required.” This is, or should be, an issue of states’ rights. States decide whether to allow other companies from other states sell insurance within their boundaries. States provide the regulatory oversight for insurance and this right would have to be overridden to effect this GOP plan. Obamacare, by comparison, preserves and really strengthens states’ rights in the arena of health insurance. Seems more than a bit ironic.

  13. 13

    @japa21: May marketing/sales die in a fiery crash and their bodies sprinkled with salt —

    When I was working as a plumber, we usually got at least one Marketing promise a year that was borderline illegal. Those meetings with Company Legal, Plumbers and Marketing were always fun and ended in someone crying. We usually got at least a request every year to do a complete rebuild of the data and claims system to accomodate the request of a group with 350 covered lives and those knock-out drag out fights to say FUCK NO were also fun.

    My current job is partially to act as an intermediary between the Plumbers and the Promisers so that the promises are somewhat plausible.

  14. 14
    Feathers says:

    Fascinating as always.

    I’d like to follow up on your Hepatitis C post with an ugly story from last night’s Boston news. Basics of the story. Man rapes woman, infecting her with Hep C. He is convicted and goes to prison, where, as required, his Hep C is treated at no cost by the state. His victim, meanwhile, is sick, with a fourth denial of coverage for the Hep C meds her rapist got in prison – because she doesn’t have stage 3 liver scarring yet. The good news was a followup where a local viewer who owns a specialty pharmacy got a different drug company to give her their drug for free.

    Good news, Mass Attorney General Maura Healy has sent letter to pharma company asking them to justify pricing, as it may violate Mass Fair Trade Laws. She points out that they are creating a public health emergency by prolonging the epidemic by pricing their drug above patients ability to pay. Also, new victims are being infected by people who could have been already cured, had they been able to afford treatment. As to the prisoner question, she also notes that to treat all prisoners with Hep C, as activists demand, would cost more than the entire current prison health system.

    Link to the local CBS stations Hep C stories. The ones I’m referring to are the first three: Hep C – Rapist treated, but not victim

    This really does highlight the problems that these outrageous pricing schemes create. Apparently elsewhere in the world, the pills cost $10 rather than $1000.

  15. 15

    @Feathers: yep, that is the problem with us IP regime. Way too much rent.

    Surprised required to have F-3 as clinical recommendation is treat all at F-2

  16. 16

    […] insurance sold within their borders. Another problem is that it is difficult for insurance carriers to build networks in areas where they do not already have a presence. Cruz reiterated that […]

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