What if the Health Insurance Companies were based in Silicon Valley?

There is justifiable uproar over the operational difficulties of the federal healthcare web site.  It needs to get fixed, and I am confident that it will be.

But the cacophony is obfuscating a far greater problem that is not the administration’s fault, and that puts the Affordable Care Act at far greater risk:  the mismanagement by the insurance companies of their ACA health insurance plans.

Remember that the greatest alternative to a mandated insurance system like ACA is a single-payer system, i.e. Medicare for everybody.  Since that would have rendered health insurance obsolete, one would think that the insurance companies would be overjoyed that instead of eliminating their business, the ACA gives them an opportunity to dramatically increase their business.

For insurance companies, it seems the business opportunity of a lifetime.  They now could add millions of people to their insurance rolls.  Granted, some are higher health risk, but many are not, and the best chance of having a balanced risk pool is to make it as big as possible.

Indeed, I imagine that a Silicon Valley based company would have used this opportunity to invest ahead of the curve and grab the largest set of customers that they could.  Then, over time, they could figure out the implications, and fine tune the cost structures.  A Silicon Valley company would have thought: let’s be aggressive in making our plans super attractive, let’s gain the most ground now, and let the investors bear the short term costs.  Over the long run it will pay off enormously.  This is the strategy we’ve seen used by many young successful companies such as Google, Facebook, Twitter, Pinterest, Dropbox, etc.  Get the customers now, while you can, and tweak the business model later.

But the insurance companies are not based in Silicon Valley, and that’s not what they did.  In fact, they seem to have done the opposite.  I can imagine the strategic offsite where somebody said, “These new customers are going to be, on average, high risk; they will have pre-existing conditions and they will be very expensive for us. So let’s price our plans as high as possible, exclude as many of hospitals and doctors from our networks as possible, and try to get our competitors to insure them instead of us.  Let’s be conservative in our actuarial analyses, and plan for the worst.  Let’s make sure that our investors take no short term risk on this new pool of customers.”

Why do I think this is what happened?  I’ve seen the impact on my own health insurance plan, and those of friends and family.  As I’ve written about previously, I’m a healthy 50+ year old (okay, maybe closer to 60-) who had great difficulty getting private insurance to begin with.  Once I did, I’ve experienced an AVERAGE premium increase of 25% per year, for 10 years.  The insurance companies have done well by me; as a holder of a high deductible plan, I’ve cost them almost nothing.   I eagerly awaited the unveiling of the ACA plans so I could easily compare my plan (which is grandfathered and I can keep if I want) with a wide range of plans from a competitive marketplace.

Covered California, our state’s ACA web site, worked perfectly well.  I looked at the bronze plans, which are the most comparable to my current plan.  Alas, the new plans fall short:

Existing plan       Comparable ACA plan

Monthly cost                     $502                       $598

Deductible                          $4100                    $4500

Max out –of-pocket       $5850                    $6350

In addition, most of my key medical providers, those based in one of the largest medical groups in my area, are not included in the new plan coverage.  In other words, I can pay 19% more, get a higher deductible, have a higher out-of-pocket cap, and not see my same doctors.  Even more maddening, my 22 year old healthy daughter is in the same boat.  Isn’t she the kind of customer they want to attract into the pool?  Well, her premium would go up by 13%, also for a higher deductible, a higher out-of-pocket cap, and without her current doctors.

Okay, I get the theory.  The cost of insurance for the young and healthy will have to go up, such that older and sicker people can get insurance at a reasonable premium.  As a long-time liberal, I’m fine with that.

But here’s what makes no sense: the insurers should WANT to attract me and my daughter into their ACA pools.  By charging more than existing individual and family policies and reducing the size of provider networks, they have effectively made certain that we – presumably all healthy, since we had to submit health information and could be denied –would NOT join the ACA pool.   I realize that this situation is not true for everybody.  Many plans are cancelled rather than grandfathered, and those people are forced into the ACA pool.   But why not strive to put everybody into one giant pool?

Here’s a thought experiment.  Imagine that the insurer made their ACA plans less expensive than my current plan, even by a little bit, and that they included broad networks.  Then we, and all the other generally healthy people they insure in the independent market, would choose the better policy under the ACA.  This strategy would give them some protection against a sicker population.   It would buy some time learn the characteristics of this new, formerly uninsured, pool of people.  And they would grab customers while they are at a transition point.

I know everybody is mad at President Obama, and there is legitimate frustration at the roll-out.  But the insurance company executives are the ones who have really blown it.  They’ve been given an amazing business opportunity.  Instead of stepping up, they are retreating into an actuarial haze, using a pricing strategy based on the past rather than on the future.  I’m not arguing that they should price their policies low as a matter of politics or moral obligation.  I’m a proud capitalist, a believer in Adam Smith’s “invisible hand”.  The insurers should have thought like Silicon Valley entrepreneurs and looked out beyond the immediate risks and into the future beyond.

It’s time to put pressure on the real culprits in the fragility of the ACA — the insurance companies — and make sure they understand that if they fail at making this system work, they ultimately risk l

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