Obamacare Co-Ops Exploit Dodgy Pricing

Will Obamacare's successful insurance co-ops fall victim to the Winner's Curse?
Even winners can be losers. Photographer: David Paul Morris/Bloomberg

One of the lesser-known provisions of the Affordable Care Act provided funding for the establishment of health insurance cooperatives, nonprofit local insurers that provide policies on the exchange. My colleague Alex Wayne reports on the major inroads they're making in some markets:

In Maine, the insurer that has enrolled the most Obamacare customers isn't the state's well-established Blue Cross Blue Shield plan, owned by WellPoint Inc. (WLP:US) It's WellPoint's only rival: Maine Community Health Options, a startup that didn't exist three years ago.

The newcomer, funded primarily by taxpayer money lent under the U.S. health-care law, has won about 80 percent of the market so far in Maine's new insurance exchange, exceeding its own expectations, said Kevin Lewis, the chief executive officer. ...

The successful co-ops "emerged as price leaders," responsible for more than a third of the lowest-premium plans offered on U.S. exchanges, according to an October report by the consulting firm McKinsey & Co.

Executives from these nonprofit groups in part credit innovative benefit designs for their success, including features that offer free doctors' visits and generic drugs, and even $100 gift cards for people who get an annual physical. In Wisconsin, many customers of Common Ground Healthcare Cooperative appreciate the company's nonprofit, member-governed business model, CEO Bob DeVita said.

"There's a long-standing upper Midwest tradition with co-ops," DeVita said in a telephone interview. "I think there was a lot of pent-up demand for that."

You can read this development in two ways. One is as the surprising success of an innovative business model. And the other is as a potential fiscal disaster.

My general understanding of health insurance markets is that they are very, very tightly priced. If a policy is significantly cheaper, it's either because the policy offers fewer benefits, its provider networks are miserly, or the insurance company has found a way to select for unusually healthy patients. (My favorite example of this in recent years was the Medicare Advantage policies that prominently advertised free gym memberships. You can imagine which seniors this benefit appeals to.)

And maybe that's what the Obamacare phones are for. An insurer with 80 percent of the state market, however, cannot be lowering its prices through cherry-picking patients. My understanding is that most of the exchange policies offer relatively thin networks compared with the policies that are sold to employers, or individuals off the exchange, so that's unlikely to be the full explanation, either. And what with all the mandates, an insurance company can't be offering dramatically reduced benefits, either.

Which suggests a worrying alternative possibility -- that the inexperienced co-ops have systematically priced their policies too low. That could hit the taxpayer in two ways: through the risk-corridor payments, which will make up excess losses, and through the $2.1 billion worth of government loans that have been made to these insurers.

Now, that's not the only explanation. Maybe they've got leaner overhead than traditional insurers. Or they know their local markets better. Or maybe they really do have a revolutionary service model. Or maybe their competition -- for whom this is only a small part of their business -- priced their policies too high, and the co-ops are closer to the "true" price of health insurance in these markets.

But in general, when I hear that an insurer is winning business by offering significantly lower rates than the competition, my working assumption is that they are about to be victims of the Winner's Curse. And if the co-ops are victims, then pretty soon, the taxpayers will be as well.

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