Here is a bit of interesting Silver Gap news from Margot Sanger Katz of the New York Times.
— Margot Sanger-Katz (@sangerkatz) September 12, 2016
She got some data from McKinsey about some rating areas and their initial pricing spreads. She can’t share the data but was willing to answer a few questions for me. Silver gapping or at least less Silver spamming seems to becoming more common.
Part of the discussion was about the minimum requirements needed for Silver gapping. I think that would be a useful post to define the plausibility space for a Silver Gap strategy.
There are a couple of major requirements. We need a market that has multiple product clusters, a clearly low cost product cluster and finally an issuer who believes that a larger enrollment pool is in their best interest. Let’s look at these requirements below the fold.
The first item that we need to care about to see if a Silver Gap strategy is plausible in a county is if there are multiple product cluster available. A product cluster is a combination of network and plan type. For instance Mayhew Insurance offers a Super Narrow Network and a Broad Network. Both are attached to EPO plan types. These are two different product clusters. The difference in network allows for a practically meaningful difference in premium. A cluster can also be a single network attached to multiple plan types. An HMO will be priced differently than a PPO for the same network in the same county.
These clusters can include multiple carriers. One of the local competitors also offers a fairly narrow network and a fairly broad network EPO product. The competing narrow network includes South Suburban General Medical Center. Mayhew Insurance does not. We have St. Anthony’s the Forgetful in network instead. St.Anthony’s is three blocks from South Suburban. Assuming the provider pricing for the narrow networks are roughly similar to each other, the Mayhew Narrow EPO and those Other Guys Narrow EPO is a single cluster.
That brings us to the next set of criteria. In markets where there are two or more distinct pricing clusters, there must be a carrier with a uniquely low priced offering. This could arise from several situations. They could be the only ones offering an HMO while all other carriers are offering PPOs. They could be offering a hyper narrow network of only one or a few hospitals or hospital chains in it while everyone else offers a broader network. They could have an amazing deal on pricing where they are offering Medicare plus a bit provider rates and everyone else is offering Commercial Employer Sponsored Insurance (ESI) rates or they’re offering Medicaid plus a bit rates and their closest competitor pays Medicare plus a bit rates. Or they can have amazing utilization management combined with truly innovative value based insurance designed that optimizes the work flow and cash flow of care. Or they could have senior management willing to lose a lot of money to buy membership as part of a broader strategy. It really does not matter why there is a single carrier with a distinctive price advantage, there just needs to be a cluster that they control.
So we need at least two pricing clusters where the low cost cluster is composed solely of a single carrier’s plans.
Finally we need the management of the firm that controls at least the lowest cost cluster to decide to engage in Silver Gapping. It is very low cost for new cost-sharing configuration to be added to a plan design and network combination. Silver Spamming is simple to do so Silver Gapping requires an active decision. The senior management must decide that they think it is in their best interest to have a risk pool that is a bit healthier but a lower market share of a larger total market. If the company believes that its products are inherently attractive they are more likely to engage in Silver Gapping. If they are offering a dogs’ vomitted breakfast of a low cost plan and they don’t offer a reasonably attractive plan in the cluster of potential second lower Silvers, they will Silver Spam.
How does this work in a monopolistic or near monopolistic market? There are some regions where multiple carriers are offering products on Exchange but due to pricing it is obvious that at least one carrier is trying to minimize their total on-Exchange enrollment without actually dropping out.
Here we need the effectively monopolistic carrier to decide that they want a broad and deep enrollment pool. They then need to offer at least two types of plan clusters. The first is a single offering of a low cost potentially restrictive design. The goal is to drive most of the healthy membership to this plan or to the Bronzes. Then a broader network or less restrictive plan is needed as the second lowest Silver benchmark. Isomorphic spamming plans are possible at the #2 Silver price point. The #2 Silver cluster is designed to pull in the sicker portion of the population. If a carrier is truly ambitious, they offer a third option at a significantly higher price point with far more choices and fewer systems of No to get some more premium revenue from the sickest individuals. But that is a flourish to a basic strategic decision.
If a monopolistic carrier only files for a single network and a single plan type (HMO/EPO/PPO), then the Silver Gapping strategy will not work even if the carrier wants a deeper risk pool as the allowable out of pocket level changes will not produce practically large pricing spreads.