Building a health plan from the ground up is difficult. And nowhere is that more apparent than in New York City, where outsized losses have already taken down two out of three startups that came onto the scene in 2014.
The startups faced four central challenges, according to a recent study published in Managed Care magazine: higher-than-average risk adjustment payments, large administrative costs, low revenue and high claims costs.
"All of those established health plans, whether they're in the Medicaid space or the commercial space, they all have a million members or hundreds of thousands of members to defer those costs across. These startup health plans that are just entering the market are hoping they get 10 or 20 or 50 thousand members."
One of the biggest problems the startups faced, according to Block, was the cost of provider networks. Since Oscar, Health Republic and CareConnect were starting brand-new networks, they contracted with rental networks like MagnaCare to get them off the ground. However, these rental costs were expensive, and the companies they contracted with had higher reimbursements for providers than other insurers had.
Oscar realized it was losing money this way and was able to shift away from the costly rental networks in 2017. The company's New York business had its first profitable quarter in the first quarter of 2018, but by that point, its fellow startups had already shut down—Health Republic in 2015 and CareConnect on Jan. 1, 2018.
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"It's unclear whether Health Republic could have ever turned it around," Block said. "CareConnect had some major issues with risk adjustment in the small group market but were actually doing OK in the individual market, but decided to end the product as a whole. And Oscar really had to make a major strategic change."
Block noted that Oscar was doing better now that it was forging its own provider network, but said it was unclear whether the profits would last, or whether the company is currently profitable. The company lost $200 million in 2016 and $58 million in the first half of 2017. The company reported a $7.4 million profit in the first quarter of 2018.
"It's unclear to me that they are going to be profitable or even remotely profitable in 2018," Block said. "It's unclear to me that in the New York market that Oscar has actually successfully turned around their financial prospects, even though directionally, they're definitely in the right direction. In other words, they're losing less money."
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Risk adjustment payments are frequently cited as a cause for the startups' poor performance. But as Block pointed out, these losses only make up about a third of the startups' total losses.
"The narrative is: blame risk adjustments. … My data says, your losses were 30% risk adjustment. Which means they were 70% something else," Block said.
"The additional part that nobody is really talking about is that actually these guys had network costs that were much higher than everybody else, and that was a key driver here," he added. "So if you want to be successful here, you have to negotiate strong contracts—and by strong contracts I mean you have to pay less per unit of service."