Yesterday TF79 asked a great question about Venture Capital (VC) backed insurers in comments:
“The VC backed insurers that attempted to buy marketshare without a concern of profitability…” can you expand on this? I would have assumed that VC’s in general would be hyper-focused on profitability at the exclusion of all else. Are they taking a loss in the short-run in exchange for long-run market power or something?
There have been three major venture capital backed ACA insurers, Oscar, Bright and Friday. Oscar is still alive at a stock price 85% below their IPO but with decent cash reserves. Bright and Friday were shut down by regulators over the past year as the state regulators were terrified at the capital reserve to potential obligation ratio.
So what do I mean “buy marketshare without a concern of profitability…”
Let’s assume that the insurers are competent-ish. This is actually a fairly large assumption as the alternative story is that these three insurers lit several billion dollars on fire to pay for learning by doing (and at that, slow learning by doing….)
We know that the enrollees who are flipping a coin between buying insurance and not buying ACA insurance are buying almost entirely on price. We know that these enrollees are relatively healthy/low cost compared to the rest of the ACA pool. We know that these enrollees likely generate a big risk adjustment payable obligation as they don’t use many services. We also know that most enrollees are like this. We know that insurers that barely miss being the least expensive plans in a metal level don’t get a lot of enrollment. We have a winner take most market.
If an insurer is mainly competing for this market segment, they want to drive down premium as far as possible below the benchmark silver plan. Assuming an insurer is constrained to price in a way that makes them break even or better, the three big options are to reduce the benefit value (low acturial value/high expected cost-sharing plans) and/or get great provider pricing (usually by having a narrow network) and/or reduce utilization (either lots of prior authorization and gatekeeping or value based arrangements to reduce dumb spending). An insurer can do all three things. Most try to do all three things.
However if we relax the constraint that the insurer needs to make a profit in a given year, we can tweak the parameters. For the same premium (partially paid for by capital reserves or VC/IPO cash), the insurer can offer better benefits, or a bigger network or less restrictions. Or for the same network, benefits and network, the insurer can take a bit off the premium. Winning the bottom price slots is really valuable in terms of head count.
So why would you want head count that you’re losing money on in the first year?
There are three legitimate business case reasons why a VC backed insurer might want to lose money in the first year to get a lot of new membership.