A Short Commentary on Insurer Participation in the Exchanges

It appears that a number of the state health insurance exchanges will see increased offerings from a larger number of health plans for 2015.  In general, this has been portrayed as a sign of success and of lower premiums.  One of the surprises, to some people, about participation in the 2014 version of the exchanges was that several of the largest insurers made very few offerings available and often didn’t participate at all in many states.  This was entirely rational, given the limited information available about the pool of people who might be enrolling, and consequently their health risks, and about the pricing behavior of the plans intending to participate, given that these plans would all be pricing largely in the dark.  Now that the first wave has enrolled and the prices of the plans in 2014 are visible, the larger plans can feel more comfortable participating.  Given the extensive effects of inertia in insurance plan decision-making, those with new offerings may decide to have a lower price than the projected price of the plans participating in 2014, hoping to pick up healthier enrollees, who are more likely to switch.  The new entrants also likely perceive that many of the plans offering in 2014 underpriced the risk they ended up with, resulting in the need to raise premiums for 2015, creating an opening for the new entrants.  And many of the more sophisticated health plan companies likely believed, correctly as it turned out, that the first year of operation of the exchanges would be characterized by operational problems.

While it certainly is better for consumers to have more choices, it shouldn’t be assumed that the competitive dynamics of exchanges will always result in lower prices.  In fact, as a subsequent post today will indicate, prices are rising very rapidly for exchange plans in 2015, at least at an 8% rate.  So the presence of more health plans certainly isn’t lowering prices.  And this is in a regulatory regime which still provides reinsurance to the plans for excessive costs; when that feature is removed next year, rates will likely be pushed even higher.  Smart health plans aren’t going to participate on the exchanges unless they feel very confident that they will make money and that means higher premiums.