One More Important Question to ask re. 2016 Rate Filings...

A few days ago, in my latest exclusive for, I listed 4 important questions to ask before freaking out about the Scary Rate Increase Headlines® which have started popping up in the news for some states. However, I forgot about a fifth one, which I hinted at yesterday in my analysis of the new Kaiser Family Foundation survey:

Bear in mind that "shopping around" doesn't necessarily mean that you switch policies, it just means that you at least looked around to see what was available.

The whole theory behind the "invisible hand of the free market = lower prices for all" mindset is that competition allows the consumer to shop around and compare pricing and other factors. However, the "competition = lower prices" theory only works if the customers actually do shop around. This year only 30% did, which is either unimpressive or impressive depending on your perspective.

However, I see a huge upside in these results: In addition to the 30% who comparison shopped, another 27% are open to shopping around...but only if the benefits of doing so are explained to them and the process is further simplified.

As it happens Richard Mayhew of Balloon Juice has already done most of the explanation for me:

Secondly, and more importantly, we have to model some type of plan switching behavior as people aggressively switched plans in 2015 in response to absolute and relative price changes. Over 30% of renewals in 2015 were active renewals and a third of those renewals were plan switches. A large proportion of the switches in 2015 went from higher cost plans to lower cost plans. I think that this dynamic will be a constant in the ACA as pricing is transparent, on exchange buyers tend to be extremely cost aware as they tend to have less money than the average American with group sponsored coverage, and the products can be reasonably compared.

To illustrate Mayhew's point, I'm going to take a hypothetical example, after taking into account the first 4 questions I asked.

Let's say that some state has 100,000 enrollees in the individual market (on + off the exchange), broken out between 2 companies.

  • Blue Cross of Whatever: 90,000 enrollees, 15% weighted price increase
  • Little Guy Healthcare: 10,000 enrollees, 5% weighted price increase

That's a weighted average increase of 0.135 + 0.005 = 14.0%, still pretty bad.

Next, let's look at the actual price increases for each. Again, to keep things simple, let's assume that both companies had the same rates in 2015: $500/month. Blue Cross captured the lion's share of the market due to their massive existing brand awareness and existing customer base, while Little Guy was the new kid on the block, a scrappy upstart insurance provider.

  • Blue Cross: $500/mo > $575/mo
  • Little Guy: $500/mo > $525/mo

What happens if 10,000 of Blue Cross's customers decide to save $50/month by giving Little Guy a shot next year? All of a sudden, the math changes:

  • Blue Cross: 80,000 enrollees paying a 15% increase ($500 > $575)
  • Little Guy: 10,000 renewed enrollees paying a 5% increase ($500 > $525)
  • Little Guy: 10,000 transferred enrollees paying a 5% increase ($500 > $525)

The actual weighted average increase in this scenario ends up being:

  • Blue Cross: 80% x 15% = 0.12
  • Little Guy: 20% x 5% = 0.01
  • Total: 12.1%

Again, a double-digit increase, but 12.1% is still better than 14% and much better than 15%.

Of course, unlike the other questions, there won't be any way of knowing the answer to this one until after January 31st, 2016.

Mayhew projects that once the dust settles, the effective rate increase nationally will only end up being about 2/3 of whatever the aggregate approved hikes end up being this fall. Around 30% of people shopped around last fall; hopefully this percentage will increase for 2016.

As I noted earlier, this is how the entire concept of the Invisible Hand of the Free Market is supposed to work: Provide a fair playing field with strictly-enforced rules and competition is supposed to resolve itself.

HOWEVER, if people don't bother shopping around then none of this works. Allowing people to simply automatically renew their policies without having to do anything each year (not even logging into their account and checking off a "I wish to renew" box or something) may make things convenient...but it also means the companies with the largest market share know that they can jack up their rates without fear of losing many (if any) customers in the process.