Original Research

A Financial Analysis of New York City Start-up Health Plans and Reasons for Their Losses


Adam E. Block, PhD
Department of Public Health, New York Medical College School of Health Sciences and Practice, Valhalla, N.Y.

Abstract

Purpose: Using New York City as an example, this research explores reasons for the consistently poor financial performance of three start-up health plans (Health Republic, CareConnect, and Oscar) while other health plans have performed relatively well in the same market.

Design and Methods: This study compiles insurer data from financial years 2014 through 2016, submitted to the New York State Department of Financial Services as part of the rate-review process, including premium revenue, claims cost, risk adjustment, administrative costs, net income, and premium. The financial data were used to create a novel metric, adjusted net income, that evaluates the financial performance of an insurer excluding risk adjustment and assuming a market average administrative cost. Descriptive statistics were used to compare the performance of start-up plans, commercial plans, and Medicaid plans in the ACA exchange market.

Results: Premiums for start-up plans were within 9% of median silver premiums yet adjusted net income was negative (–$190 PMPM) for all three start-ups while it is positive (+$27 PMPM) for the non–start-ups. The difference in adjusted net incomes shows that poor financial performance of start-ups was due to claims costs, not high administrative costs and poor performance in risk adjustment.

Conclusion: The consistent financial losses by New York City start-ups is driven by higher-cost provider contracts for the start-ups relative to competitors.

Introduction

In 2014, New York City was widely considered an ideal market for the structured competition among health plans envisioned by the Affordable Care Act (Rabin 2013a). Large-­market demand stemmed from a sizable self-employed labor force of independent consultants, artisans, and day-traders and artists, while market supply included robust Medicaid managed care and commercial markets, plus three brand-new start-up insurers. Table 1 summarizes the 2014 exchange market structure including 10 plans, all with premiums far below 2013 individual market levels (Rabin 2013b).

TABLE 1
Overview of New York City individual market plans
Plan name Description Enrollment (% of plans listed) 2018 status
Start-up
Health Republic Health Republic was an ACA CO-OP funded with federal loans 147,744 (17%) NYS forced exit Nov. 30, 2015a
CareConnect CareConnect, a subsidiary of Northwell the largest hospital system in New York State 52,298 (6%) Exited market Jan. 1, 2018b
Oscar Oscar, a pure tech venture aiming to apply Silicon Valley solutions to health insurance 107,569 (12%) Expanded into N.J., Calif., Texas, Tenn., Ohioc
Medicaid
Affinity Bronx-based Medicaid plan 24,600 (3%) Exited individual market in 2018d
Fidelis Catholic Church-affiliated plan: purchased by Centene for $3.75B in Sept, 2017e 161,431 (18%) Offers coverage
Healthfirst Health plan owned by a consortium of New York City regional hospitals 52,601 (6%) Offers coverage
MetroPlus Health plan owned by the City of New York 62,454 (7%) Offers coverage
Commercial
Emblem Regional commercial plan insuring NYC employees 62,233 (7%) Offers coverage
Empire BCBS Anthem-owned, for-profit Blues plan in NYC region 191,895 (22%) Redeveloped products in 2018f
United National commercial plan 21,755 (2%) Offers coverage
Sources: aWaldholz 2016, bLynam 2017, cSchlosser 2017, dNYS-DH 2017, eCoombs 2017, fSchreiber 2017 and author’s analysis of health plan websites
Notes: Queens County had the largest enrollment in the New York City Exchange Plan region and was used as the base county for determining health plan participation. Start-ups are defined for this paper as insurers that had not previously offered insurance in the individual market or in New York’s Medicaid Advantage market as prepaid health service plans.
BCBS=Blue Cross Blue Shield, CO-OP=Consumer Operated and Oriented Plan, NYC=New York City, NYS=New York State.

Publicly available rate submission data show that New York City’s start-up health plans, Health Republic, CareConnect, and Oscar, had disproportionately poor financial performance between 2014 and 2016 (NYS-DFS 2017).

Undercapitalization led Health Republic to a forced closure by the New York State Department of Financial Services (NYS-DFS) effective Nov. 30, 2015 (Waldholz 2016). CareConnect voluntarily ended individual contracts effective Dec. 31, 2017 (Lynam 2017). When CareConnect exited the market in 2017, its membership was not offered the chance to renew during the 2018 open enrollment period. When Health Republic closed, the membership was distributed to alternative plans.

Figure 1 shows that between 2014 and 2016, Oscar accumulated losses of $182 per member per month (PMPM), totaling $235 million or 46% of its 2014–2016 revenue (see Table 3 for calculation). Those financial losses were larger than any other company in the New York City individual market except Health Republic.

TABLE 3
Net income as a proportion of premium
Plan Sum of member months Sum of total premiums ($) Sum of net income ($) Sum of % net income of premium PMPM ($)
Affinity 295,199 107,917,557 –22,110,421 –20% –75
CareConnect 627,571 257,547,975 –94,774,476 –37% –151
Emblem 746,795 322,185,003 –63,839,792 –20% –85
Empire HMO 2,302,745 1,105,591,889 56,571,839 5% 25
Fidelis 1,937,176 697,921,470 46,653,626 7% 24
Health Republic 1,772,932 818,192,488 –636,187,001 –78% –359
Healthfirst 631,215 259,013,426 –5,202,112 –2% –8
MetroPlus 749,442 292,386,663 –44,313,356 –15% –59
Oscar 1,290,830 508,835,581 –235,206,464 –46% –182
UnitedHealthcare 261,061 145,510,703 –14,485,621 –10% –55
PMPM=per member per month.

The objective of this analysis is to better understand why start-ups in the New York City market performed poorly relative to traditional commercial plans and Medicaid plans entering the ACA exchange market in 2014.

Methods

The NYS-DFS requires submission of aggregate historical financial data for each ACA exchange product for the most recent year available in Exhibit 17 of the rate submission (NYS-DFS 2017). Claims data are two years old, meaning rate submissions for the 2018 plan year contain data from 2016.

For this study, the NYS-DFS data for plan years 2016 to 2018 were compiled manually into a database. The database includes individual plans (on and off the ACA exchange) and the Essential Plan. (The Essential Plan was the name given to the Basic Health Program in New York. Under the ACA, states were allowed to set up Basic Health Programs that offered health plans for low-income people whose incomes were too high for them to be eligible for Medicaid). Financial data pertain to all counties where the plan participated, including those outside of the New York City rating region.

Five financial metrics were extracted from the DFS financial reports including total incurred claims, total reinsurance, total risk adjustment, total administrative expenses, and premium revenue. These metrics were used to construct a new metric, net income, which is calculated this way: premiums – (total incurred claims + administrative costs + total risk adjustment + total reinsurance) (Figure 1).

FIGURE 1: Net income (individual market) for 2014–2016 PMPM

Source: NYS-DFS Exhibit 17 compiled by author

Adjusted net income, shown in Figure 4, is another new metric and is calculated this way: net income – (risk adjustment + administrative costs – average administrative costs for all plans). This metric was developed and applied because it compares the net income across health plans as if 1) risk adjustment did not exist and 2) administrative costs were the same across all health plans. This is important because it will show whether the poor financial performance of start-up plans is due to risk adjustment, administrative costs, or for some other reason.

Putting aside the complexities for a moment, the reasons for a health plan’s poor financial performance can be grouped into four categories:

  1. High risk adjustment
  2. High administrative costs
  3. Low revenue
  4. High claims costs

This study included a financial analysis of each of these metrics to identify the driving factor for the closure of two of the three start-up health plans in New York. Strategic pricing below market price with the objective of acquiring share was considered, so a premium comparison was performed. Premium data were compiled from New York State of Health (NYSOH) data releases of average premiums by plan and region (NYS-DFS 2015, NYS-DFS 2016, NYS-DFS 2013). For simplicity’s sake, the financial analysis is limited to the individual market only.

Results

Risk adjustment

Risk adjustment is an ACA-required program where fully insured commercial health plans must submit information to CMS on the medical risk of their populations. CMS calculates the relative risk of each health plan’s population. Plans with healthier-than-average populations make payments to plans with unhealthy populations throughout the state. Exhibit 3 shows that in 2016, the PMPM cost of risk adjustment for start-ups exceeded the cost for commercial plans but was far below the cost of risk adjustment to Medicaid plans. In addition, financial losses of start-ups far exceeded their risk-adjustment payments. Oscar’s 2016 loss was $200 PMPM, of which $61 PMPM (30%) was due to risk-adjustment payments. Similarly, CareConnect’s 2016 loss was $165 PMPM, of which $57 PMPM (35%) was due to risk adjustment (see Technical Appendix 1, for calculation). This means risk adjustment played only a part of the poor financial performance of these start-up plans. Health Republic’s risk-adjustment payment of $6 PMPM was about 1% of its massive $529 PMPM loss in 2015, its final year of participation in the New York State exchange.

FIGURE 2: Risk adjustment PMPM in 2016

Source: NYS-DFS Exhibit 17 compiled by author

Administrative costs

Figure 3 shows that start-up administrative costs in 2016 were higher than administrative costs of established plans—more than $100 PMPM for Health Republic and Oscar. The 2016 weighted average of the three start-ups’ administrative costs was $104 PMPM while the weighted average of all other plans’ administrative costs was $49 PMPM, meaning start-up administrative costs were an additional $55 PMPM more than competitor administrative costs. However, this additional $55 PMPM is only 28% of the 2016 losses of Oscar ($200 PMPM) and 34% of the loss of CareConnect ($165 PMPM). Note: Health Republic exited the market during 2015.

Figure 3: Individual market administrative costs PMPM 2016*

*Health Republic administrative costs from 2015 because plan did not participate in 2016
Source: NYS-DFS Exhibit 17 administrative costs compiled by author. PMPM=per member per month

Revenue

Table 2 shows that the average premiums for plans at the silver level (the most commonly sold plan among the “metal” levels) of the three start-up plans between 2014 and 2016 ranged from 2% below the median to 9% above the median premium of $414 PMPM for a single adult between 2014 and 2016. Premiums for other metal levels may vary.

TABLE 2
Average silver plan premiums from 2014–2016 in New York City region
Health plan Rank Average silver plan premium 2014–2016 Premium relative to median ($414)
United 1 $579 39.9%
Empire HMO 2 $498 20.3%
Oscar 3 $449 8.6%
Healthfirst 4 $420 1.5%
Emblem 5 $416 0.5%
Health Republic 6 $412 –0.5%
CareConnect 7 $407 –1.7%
Affinity 8 $403 –2.6%
Fidelis 9 $394 –4.8%
MetroPlus 10 $370 –10.5%
Source: NYS-DFS premium releases
Adjusted net income

Figure 4 shows adjusted net income (Net income – [risk adjustment + administrative costs – average administrative costs]) for all plans were –$83 PMPM at CareConnect, –$86 PMPM at Oscar, and –$305 PMPM at Health Republic. Meanwhile, adjusted net income of all other plans was +$27 PMPM.

FIGURE 4: Adjusted and unadjusted net income PMPM total, 2014–2016

Source: NYS-DFS Exhibit 17 compiled by author

DISCUSSION

The financial data, which are all publicly available but never have been compiled and analyzed in this way, show the key driver of the disproportionately poor financial performance of start-up plans in New York City was neither risk adjustment nor administrative costs nor premiums, so therefore, losses must be primarily driven by provider claims costs.

Risk adjustment

While CareConnect and Oscar leadership both directly attributed their poor financial performance to the risk-adjustment program (Goldberg 2016, Lynam 2017), this analysis of the data shows that risk adjustment was responsible for only about 30% of the net loss of these plans in the individual market. In addition, while start-ups have less experience in risk adjustment, the program is a level playing field for all plans because the rules of risk adjustment are created by CMS as a part of the formal regulatory development process, including a comment period and rule finalization (CMS 2014). The rules of risk adjustment were available for all the players in the market in advance of the start of the plan year, making the practical application of risk adjustment equal across all plans, although there is some anecdotal evidence that newer plans have performed poorly (Goldberg 2016).

Three start-up health plans had a combined net income of –$966 million, of which $158 million (16%) was due to risk adjustment. Non–start-up health plans had a net income of –$46 million in spite of making $338 million in risk adjustment payments. Therefore, while risk adjustment may be a contributor, it is not the sole driver of poor financial performance. While this paper focuses on the individual market, CareConnect faced a 2016 risk adjustment payment of $112 million in the small-group market, and although plans can enter or exit markets independently, the small-group market payment played a role in the decision in the individual market (Dowling 2018).

Administrative costs

Similarly, the results section showed that start-ups had administrative costs of $104 PMPM while non-start-up health plans had administrative costs of $49 PMPM, a difference of $55 PMPM. Net losses for start-ups exceeded $150 PMPM, so excess administrative costs were only about a third of those net losses.

Relatively high administrative costs for start-up health plans are expected because start-up health plans have large initial administrative costs, including developing claims processing systems, building work facilities, licensing insurance products, training new staff, and developing a provider network. In addition, initial enrollment may be small while established health plans can distribute fixed costs across a broader membership. Therefore, the administrative costs per member of health plan start-ups was expected to be higher than the administrative costs of established plans, but the excess administrative costs made up only a third of the losses, meaning a large portion of the loss was unrelated to this expected expenditure.

Revenue

Table 2 shows that start-up health plan premiums were within 9% of the market median, so the prices the start-ups plans charged were competitive; they did not egregiously underprice their premiums to gain market share. Healthfirst, Fidelis, and MetroPlus—plans sold primarily in the Medicaid market—were financially stable between 2014 and 2016 at a premium similar to what the start-ups charge.

Claims costs

Figure 4 shows that after controlling for administrative costs and risk adjustment, start-up health plans still had disproportionate financial losses. This suggests that in New York City, start-up health plans had a systemic issue leading to persistent financial losses in addition to high administrative costs and poor performance on risk adjustment. Financial data from the New York City individual market health plans show that start-up plan premiums were in the same range as established plan premiums, yet insufficient to cover costs even after adjusting for risk adjustment and above-average administrative costs. Therefore, the financial performance issues are due to claims costs.

Here are three possible explanations for why claims could be higher for start-ups:

  • The health of the start-up population was worse.

    It is unlikely that all three start-ups selected for worse risk while simultaneously having low risk-adjustment scores, indicating the populations had better than average risk.

  • Medical management was less effective at start-ups.

    The magnitude of any possible medical management differential is dwarfed by the financial losses, which are in excess of 35% of premium revenue for each start-up.

  • Start-up networks were more expensive.

    The most likely reason for the poor financial performance of the start-up plans in New York City is start-up plan networks were expensive. The high cost may include a broader network or contracts with higher reimbursements for all providers. Both Oscar and Health Republic licensed a rental network called MagnaCare, which was known for having high reimbursement rates, providing some evidence that network contract costs drove start-ups’ poor financial performance (Fischer 2014, Waldholz 2016). Oscar recognized the provider network as a driver of loss and redesigned its strategy, shifting away from rental networks for years 2017 and beyond. While still unprofitable in 2017, its loss was $64 million, or $124 PMPM (down from $200 PMPM in 2016), and Oscar’s New York business had its first profitable quarter in Q1 2018.

Conclusion

Starting a health plan is difficult. Of the three 2014 start-up health plans in New York City, one closed during 2015 and another closed after 2017. Only Oscar remains, and it racked up cumulative losses of $235 million from 2014 to 2016 (NYS-DFS 2018).

Although administrative costs and risk adjustment contributed to financial losses, expensive network contracts were the critical driver in the poor financial performance of these start-ups. Success of the exchanges can be enhanced by improving the environment for programs like risk corridors that reduce risk to plans. At the same time, start-ups must recognize that efficient network contracts are essential for financial success.

References

Glossary of terms used in this article

Administrative costs
All nonmedical costs associated with a health plan, including but not limited to labor, rent, claims processing costs, and information technology.
Claims costs
All medical costs paid by the insurer, including hospital, physician, and pharmaceutical costs on behalf of members. Dental and vision costs may be part of claims costs if those services are covered.
Commercial health plan
A plan that has maintained a commercial insurance license and participated substantially in the individual and or group markets prior to 2014.
Individual market
Health insurance purchased by an individual, not through an employer.
Medicaid health plan
A plan entering the individual market that previously has exclusively or primarily offered insurance in government products, such as Medicaid or Medicare.
Medical management
Activities performed by a health plan to reduce patient medical expenses, such as requiring preauthorization for advanced imaging.
New York State Department of Financial Services
The department in New York State government that oversees insurance regulation and enforcement.
Per member per month (PMPM)
Revenue and expenses in health insurance markets are frequently analyzed on a per member per month basis so they can easily be compared with premiums, which are generally calculated as per member per month payments.
Premiums
Monthly payments made by a bene­ficiary to a health plan. If a member is eligible for tax credits, this includes both the member share and the tax credit.
Rate submission
A New York State requirement that premiums be submitted to the Department of Financial Services of New York State with actuarial support in June for individual market insurance products sold in January of each year. The state can then approve, deny, or request modification of premiums.
Rental network
A network licensed by a health plan from another organization rather than having contracts written directly with the plan.
Risk adjustment
Federal program required for all plans participating in the individual market (on- and off-exchange) where health plans with a lower risk population relative to plans in the same market make a risk adjustment payment and plans with a higher risk population receive a risk adjustment payment.
Risk corridors
A temporary program created by the Affordable Care Act, effective 2014–2016, designed to collect profits above a certain level from successful plans and redistribute them to plans losing above a certain level. The program was initially guaranteed by the federal government, but this guarantee ended in 2015. Plans “owed” payments were paid pennies on the dollar for 2014 and nothing for 2015 or 2016.
Start-up health plan
A health plan that did not have a license to sell health insurance in the commercial or Medicaid markets prior to the start of 2014.

Corresponding author:
Adam E. Block, PhD
Assistant Professor of Health Policy and Management
Department of Public Health
New York Medical College School of Health Sciences and Practice
40 Sunshine Cottage Road, Skyline Building, Room 2N-B10
Valhalla, NY 10595
Office: (914) 594-2041
ablock4@nymc.edu
Disclosures: None.

Acknowledgements: I would like to thank Jacob Wallace, Michael Cohen, Erin Strumpf, Mike Adelberg, Drew Franklin, and Chris Koller for helpful ideas and comments.

Technical Appendix 1

Grouping of companies with varying names

Technical Appendix 1 shows how company names that varied in financial statements from year to year were aggregated. For example, North Shore–LIJ CareConnect Insurance Co. Inc., CareConnect, and CareConnect Insurance were all aggregated into CareConnect.

Part I
Health plans in financial statements
Company names* Company name grouped
Affinity Affinity
Affinity Health Plan Inc. Affinity
CareConnect CareConnect
CareConnect Insurance CareConnect
CDHP-Grp. HSA Empire HMO
CR-GR-PPO.A/Rev Empire HMO
Empire HealthChoice HMO Inc. Empire HMO
Empire HealthChoice HMO Inc. Empire HMO
EPO SG INN Cert 0407 Empire HMO
EPO SG INN Cert 0407 with rider: R-Prism EPO-SG.Rev0110 Empire HMO
G-HMO-IN with OON contract: G-POS-OUT Empire HMO
Health Insurance Pla Emblem
Health Insurance Plan of Emblem
Health Republic Insurance of New York Health Republic
Healthfirst PHSP Inc. Healthfirst
HNY HMO-CERT-44; HNY HMO-CERT Empire HMO
HNY HMO-CERT-44B; HNY HMO-CERT-B Empire HMO
MetroPlus MetroPlus
MetroPlus Health Plan Inc. MetroPlus
New York State Catholic Fidelis
New York State Catholic Health Plan Inc. dba Fidelis Care New York Fidelis
North Shore–LIJ CareConnect Insurance Co. Inc. CareConnect
NY State Catholic Health Fidelis
Oscar Oscar
Oscar Insurance Corp. Oscar
R-EPO-Blue Essential 2011 Empire HMO
UnitedHealthcare of New UnitedHealthcare
UnitedHealthcare of New York Inc. (UHC) UnitedHealthcare
*The plan names, include some incomplete names, are how as they appeared on financial statements examined by the author.
Part II
Health plans in premiums table
Company* Grouped name
AETNA LIFE Aetna
AFFINITY Affinity
AMERICAN PROG American Progress
ATLANTIS Atlantis
NORTHSHORE LIJ CareConnect
CDPHP HMO CDPHP
GHI Emblem
HIP HMO Emblem
HIPIC Emblem
EMPIRE HMO Empire
EXCELLUS Excellus
NEW YORK FIDELIS Fidelis
FREELANCERS Health Republic
HEALTHFIRST Healthfirst
HEALTHNOW HealthNow
IHBC IBC
METRO PLUS MetroPlus
MVPHP-HMO MVP
OSCAR Oscar
OXFORD HMO United
UNITED United
North Shore LIJ CareConnect
CDPHP CDPHP
Crystal Run HP Crystal Run
Emblem HIP Emblem
Empire Assur. Empire
Fidelis (NYS Cath) Fidelis
Health Republic Health Republic
MVP HP MVP
Oxford OHP United
UHNY United
Wellcare Wellcare
CDPHP UBI CDPHP
EMPIRE BCBS Empire
IHA HMO IHA
MANAGED Managed
METROPLUS MetroPlus
MVP SERVICES MVP
MVPHP2HMO MVP
OXFORD OHI United
Aetna Aetna
Crystal Run HIC Crystal Run
HealthNow NY HealthNow
Managed Health Managed
United HIC United
*Variations in the spelling of names reflect their appearance in the financial statements examined by the author.
TECHNICAL APPENDIX 2
Net income by plan in 2016 only
Plan Name Sum of net income without risk adjustment and avg admin costs of plan Sum of net income Sum of net income PMPM Sum of net income without risk adjustment and avg admin PMPM Sum of total premiums Sum of member months
Empire HMO $10,568,160 $21,863,496 $30 $14 $428,191,738 734,880
Fidelis $36,672,069 –$3,752,340 –$6 $55 $250,214,045 670,296
Healthfirst $3,990,025 –$4,364,044 –$27 $25 $70,324,097 162,270
MetroPlus $5,522,697 –$21,155,503 –$96 $25 $85,237,821 219,694
Affinity –$3,936,974 –$11,655,717 –$143 –$48 $31,037,143 81,464
Emblem –$18,847,336 –$20,860,521 –$143 –$130 $72,212,446 145,388
UnitedHealthcare –$14,391,876 –$13,805,591 –$144 –$150 $50,484,767 96,127
CareConnect –$35,674,392 –$57,534,599 –$165 –$102 $144,905,455 348,549
Oscar –$67,179,599 –$144,574,167 –$200 –$93 $289,633,058 724,467