Asymmetrical Information - Megan McArdle

06.14.13

Model Health Insurer Has Some of the Highest Rates on the California Exchanges

Kaiser Permanente's bids look expensive compared to competitors. Why so high?

Kaiser Permanente is one of the places that always gets cited as a model by health care reformers.  It's the biggest insurer in California, using a model that ended up being the basis for the HMO revolution.  Kaiser owns its own hospitals, pays its doctors a salary, and provides the "continuum of care" that everyone says they want from our fragmented health care system--and does it at a reasonable price.  So it's a bit surprising to see the LA Times report that this model citizen submitted some of the highest bids for California's health care exchanges.  

What's going on here?  There are two rival explanations.  The first is that the other companies on California's exchanges responded to pricing pressure from the state by slashing access to their networks.  Blue Shield, for example, submitted a plan to Covered California which offers access to only 36% of their physician network.  Kaiser can't do this so easily, because they don't have a group of primary care physicians, a group of gastroenterologists, and so forth, from which they can choose the cheapest bidders for their exchange plan.  Kaiser's system is a densely woven web; you can either have access to all of it, or none of it.  And giving folks access to all of it costs money.  

The other explanation is that Kaiser is doing a fine bit of cherry picking.  Poverty is associated with poor health.  And if you're one of the highest priced plans on the exchanges, you're not very likely to pick up a lot of poor customers.  

These theories aren't mutually exclusive, of course; Kaiser executives may have fretted about the problems of splitting up their network, and then stopped trying when they realized that all this would do would add a lot of very expensive and hard to treat new customers to their rolls.  

What this does suggest is that California is headed for two-tier service on the Exchanges.  The carriage trade will head for full-service networks like Kaiser, with full access to the whole network of doctors and hospitals.  The price conscious buyers--likely to be a sizeable majority--will crowd into plans with restrictive networks.  And those networks will be very, very crowded.  Effectively, they may end up as quasi-catastrophic insurance, simply because it will be difficult to actually access care outside of the emergency room.  

Lower down the income scale, the new Medicaid patients--about half the expected additional coverage in states like California--will be similarly crowded, simply because Medicaid's low reimbursement rates make doctors reluctant to take it.  

This doesn't necessarily translate outside the state of California, however.  California has been pretty aggressive about prodding insurers for low rates, which is why Blue Shield and other insurers offered restricted networks.  In states without that kind of muscular regulatory action, the bids on the exchange may well be higher, but offer more premium access.  This will be something to watch for as the exchanges evolve over the next nine months.