The Alan Katz Blog

Perspectives on Health Care Reform, Politics and More

Update: The Supreme Court and Transparency

The United States Supreme Court recently rendered its decision in a case known as Gobeille v Liberty Mutual Insurance Company. The Court decision rests on an interpretation of ERISA. Nonetheless, in a result illustrative of the tangled complexity of health care coverage, the most profound impact the Court’s opinion may have is to undermine states’ efforts to control health care costs by making medical treatment expenses more transparent.

In an earlier post I provided some background on the case and discussed the import of the (then) pending Supreme Court decision. Now that decision is here and it’s time for a brief update.

Simply put, the Court, on a 6-2 vote, decided that ERISA overrode Vermont’s interest in requiring self-insured health plans to report claims data into a state’s all-payer claims database. As Ronald Mann lays out in his analysis of the case on SCOTUSblog, the Court majority found that Vermont’s requirements were inconsistent with ERISA’s preemption of all but the most trivial state record keeping requirements.

While the decision rested solely on the Court’s interpretation of ERISA, the case will have a substantial impact on the ability of states to use transparency to hold down medical costs. As Erin Fuse Brown and Jame King note in their post on the Health Affairs Blog, “63 percent of America’s workers with employer-sponsored health insurance are in self-funded plans. In Vermont, the ruling eliminates data from 20 percent of the total population ….” In some states this percentage will no doubt be much higher. Self-funding is the approach of choice for many employers with a large number of workers; Vermont has relatively few of these employers compared to other states.

States have sought to establish all-payer claim data bases to enable research into the variation in costs for similar medical procedures. The Court’s decision means these data bases will be unable to capture data from all-payers. It’s hard to see how America’s health care system can become more cost-effective in the future without the means to accurately measure how cost-ineffective it is today.

The majority on the Supreme Court indicated that ERISA may empower the Department of Labor to require self-funded plans to report claims data to state databases. The key word here is “may.” The Court isn’t definitive on the validity of this workaround. Any attempt by the Department to impose this requirement could wind up before the Supreme Court in another few years.

For now, however, Gobeille v. Liberty Mutual will make analysis of cost differences in America’s health care system much tougher.


Supreme Court May Undermine State Transparency Efforts

When it comes to health care, costs matter. This may seem obvious, but it’s remarkable how often this reality gets lost in the arguments of the day. Yet consider: depending on the market segment, the Affordable Care Act requires that 80%-to-85% of every premium dollar be spent on medical care. This means the more medical care costs, the more insurance policies cost. One might hope that higher health care prices also correlates with better medical outcomes. One might hope that was the case, but one would be wrong.

Over the years there have been several studies demonstrating this disconnect between medical costs and quality of care. A Health Affairs Blog post authored by Jonathan Skinner, David Goodman and Elliot Fisher in analyzing a recent report provides links to others done over the years. Then there’s a study by Castlight Health showing the cost of mammograms in Los Angeles ranging from $86-to-$954–the pricing disparity in other cities such as Dallas and New York were even greater.

Advocates assert that medical pricing transparency will lower insurance premiums by promoting competition among medical providers and allowing consumers to shop for the lowest cost quality care. Payers like large employers, insurers and the government, could also use this information to negotiate lower charges for health care services.

Yet America’s health care system is amazingly opaque when it comes to pricing. As Steven Brill reported in his Time Magazine cover story, so is the method providers use to set their prices.Cost effectiveness leaves the room when there’s little rhyme or reason for how physicians and hospitals set prices.

Key to effective pricing transparency is meaningful data and lots of it. As the National Association of Health Underwriters puts it, the need is for “current, accurate, unbiased and relevant data” available in “a format and process that is user-friendly.” Which is why 18 states have laws requiring self-insured companies and other payers to contribute patient claims data to a pricing database.

Some of these self-insured companies, however, are pushing back. They fear the costs of complying with differing state requirements. Liberty Mutual Insurance Company is one of those companies. They sued the state of Vermont claiming the state could not demand claims data from them because ERISA denies them the power to do so.

The Second Circuit Court of Appeals agreed with the company. The case, Gobeille v. Liberty Mutual Insurance Company (often referred to in the media as Liberty Mutual v. Gobielle) is now before the Supreme Court, which heard oral arguments on December 2, 2015. Tyler Vandeventer and Jason Ottomano provide specifics concerning the case and the arguments on Cornell University Law School’s Legal Information Institute site.

The Supreme Court’s decision in this case will have a significant impact on pricing transparency and, consequently, the affordability of health care coverage. Without claims data, cost comparisons simply aren’t possible. This isn’t the case of garbage in, garbage out. This is nothing in, nothing out.

The Court’s decision will also clarify how states can interact with self-funded plans under ERISA. This too could have far-reaching impacts.

There are many more high-profile cases before the Supreme Court than Gobeille v. Liberty Mutual. None of those, however, are likely to have a greater impact on transparency and the cost of health insurance.

No date for a decision in Gobielle v. Liberty Mutual has been set.

A version of this post appeared on my LinkedIn page.

Zenefits Adds Domain Expertise to Leadership Team

David Sacks, the new CEO of Zenefits, just announced extensive changes to the company’s leadership team, an important step in his efforts to reshape the company. By adding individuals with backgrounds in the services the company delivers to consumers, this looks to be a move in the right direction.

Previously I’ve criticized Zenefits for a lack of expertise concerning benefits, payroll, or human resources among board members or top executives. While Zenefits is primarily a technology company, the services they deliver–what their customers pay for–are tools to help companies manage these important business operations. That no one among Zenefits most senior leaders had experience in these areas is one reason, I believe, Zenefits faces the problems they do today.

The Zenefits board is still composed only of men with backgrounds in finance and technology. The former executive team, at least those deemed worthy of being listed on their website, shared this narrow expertise, broadened only by the time some of them spent as business consultants. In a post on the company’s blog today, Mr. Sacks announced 14 members of the “new executive team,” three of whom had experience in benefits, payroll or human resources before joining Zenefits:

  • Jeff Hazard, VP of Sales and Agency Principal Agent is in charge of all the company’s sellers. Previously Mr. Hazard was a divisional vice president of sales at ADP.
  • Colin Rogers, VP of Carrier Relations worked at Accenture Consulting helping develop their Consumer Driven Healthcare practice. He was also at Extend Health (now part of Towers Watson).
  • Josh Stein, Chief Compliance Officer served as senior vice president and general counsel at OptumRx, a part of UnitedHealth Group.

It will not be easy for Mr. Sacks to achieve his goal of changing the culture at Zenefits. Expanding his leadership team and include individuals who understand the services the company delivers to customers, however, shows he is serious and off to a promising start.

Zenefits’ Troubles Don’t Let Brokers Off the Hook

Zenefits is in trouble. Serious, existential trouble. Some community-based benefit brokers are watching the calamity at Zenefits unfold with a mixture of Schadenfreude and relief. Given the scorn and ridicule Zenefits heaped on these brokers, taking pleasure from its misfortune is hard to resist. Feeling relief, however, misreads the situation and is dangerous to one’s career.

Zenefits’ Troubles

Zenefits could go out of business and several of its employees could be jailed as a result of the business practices reported by William Alden of BuzzFeed News and other journalists. While unlikely, this is a possibility because:

  • Zenefits created software enabling some California employees to lie to regulators concerning the time they spent on pre-licensing training. California law requires those applying for an insurance license to devote 52 hours to this curriculum. Zenefits employees signed a form, under penalty of perjury, that they had done so. Some may not have. Perjury is a felony in California and conviction can result in up to four years imprisonment. If Zenefits cheated in qualifying agents to sell in California, other regulators are no doubt looking into whether the company did this in their states, too.
  • If found guilty of violating consumer protection laws, state regulators could revoke Zenefits’ insurance licenses. Without the license Zenefits could no longer sell new policies and insurance companies would likely terminate, for cause, their Zenefits contracts. The insurers would then stop paying commissions to Zenefits even on previously sold policies. License revocation in one state could result in losing their licenses elsewhere. A cascade across the country of revoked licenses and terminated contracts could cost Zenefits tens of millions of dollars.
  • If Zenefits loses its licenses, commissions on current policies and ability to sell new ones, then some of its more recent investors may demand their money back. (Let me be clear: I am not accusing anyone at Zenefits of committing fraud or any other crimes. What follows is totally and only hypothetical and speculative.) In May 2015, Zenefits raised $500 million in a capital round led by Fidelity Investments and private equity firm TPG. If Zenefits management knowingly hid legal problems from them (and I’m not accusing anyone of doing so) then Fidelity and TPG could claim inducement by fraud, seek to rescind their contract, and demand Zenefits return their investment. I’m not saying this happened or that investors were misled in any way. Nonetheless, I’d be surprised if Fidelity and TPG lawyers are not also speculating about this.

Zenefits worst case scenario, then, is that the company pays millions of dollars in fines, loses many millions more in revenue, sees employees jailed, can no longer sell insurance, irreparably damages its brand, and must repay some investors.

Maintain Perspective

That’s a pretty scary worst case scenario. Based on we know today, it is also highly unlikely to happen. No regulator has found Zenefits in violation of anything. Regulators are unlikely to impose the most severe penalties available to them if their investigations do not reveal consumer harm. The steps David Sacks, Zenefits’ new CEO, is taking will likely mitigate any penalties imposed on the company. Several employees, including former CEO, Parker Conrad and sales VP Sam Blond have already left the company and more may follow. Zenefits now has its first compliance officer. Mr. Sacks also seeks to change Zenefits values.

I’m skeptical, however, that Zenefits can or will quickly change its culture and core values. I respect Mr. Sacks’ intentions, experience and abilities. He deserves a chance to make his turnaround work. Yet changing a company’s culture usually takes considerable time and Zenefits’ culture is deeply infused with the Silicon Valley ethos of speed, innovation, disruption and risk taking. To transform Zenefits requires a different world view. Yet in announcing Mr. Parker’s resignation, the company added three new board members—all current investors with no domain expertise.

In fact, no current Zenefits board members or executives listed on their site appear to have any experience in running a human resources firm, payroll company, or insurance agency—the services Zenefits delivers. What they share is deep experience in well-known tech companies. Zenefits may be a technology company, but that tech is supposed to accomplish something. Only in places like Silicon Valley would lack at the top of the company of this domain expertise be celebrated. Zenefits seems to exist in a Valley-sized bubble and it’s tough to change what’s in a bubble from the inside.

The Real Lesson of Zenefits

Yet, in spite of these problems and hurdles, Zenefits is likely to survive. They reportedly have enough cash on hand and no need to seek more. The most probable outcome from the various investigations is that, absent findings of intentional and substantial criminal malfeasance, Zenefits will keep their licenses, carriers will continue paying commissions, and investors will keep their money in the company.

We don’t yet know how Zenefits ongoing saga plays out. What we do know are some lessons this scandal teaches, especially to brokers.

Lesson one: consumer protection laws matter. Violate them and there’s a huge price to pay; as there should be.

Lesson two: arrogance is unbecoming and unhealthy. Zenefits is a company whose leaders proclaimed that community-based brokers were fucked, promised to drink brokers’ milkshakes, claimed brokers barely knew how to use email, described their profession as a dead beast lying in the desert and, well, you get the idea. The danger is that arrogance of this magnitude easily morphs into hubris. Zenefits’ hubris was the apparent belief that it could ignore rules if they get in the way of achieving the growth promised investors.

Lesson three: even broken companies get some things right. Zenefits identified a latent customer demand. Clients want more from brokers than help with benefit plans. They want to focus on their businesses and not be distracted by HR and benefit administration. Zenefits success makes clear there’s a disadvantage to only selling and servicing insurance plans. Clients want more from their brokers. Even in the unlikely event Zenefits goes away, this client need will not.

Lesson four: there’s more where they came from. Zenefits’ demise would not mean the end of well-funded tech companies challenging community-based benefit brokers. If Zenefits falls to the way side, others are ready to take their place using the same tactic of giving away software to employers in exchange for being named the employers’ broker of record on benefit policies.

Seeing a bully humbled is always fun and there’s no harm in brokers enjoying the sight of Zenefits in disarray. Those brokers who believe Zenefits predicament means they no longer need to step up the services and value they deliver their clients, however, are making a costly mistake.

Full disclosure: I’m co-founder of a company soon launching NextAgency, a platform enabling benefit brokers to level the playing field against hi-tech competitors and step up the services and value they deliver their clients.

A version of this post is scheduled to appear in the March issue of California Broker magazine.


How Likely is Zenefits to Change?

Zenefits changed CEOs the other day and its new leader declared the company’s old culture inappropriate. He promised to instill new values in the company. All well and good. But is meaningful change really likely at Zenefits?

Founder Parker Conrad is out as Zenefits CEO and David Sacks, until yesterday its chief operating officer, is now in charge. The reason: lax compliance procedures leading to investigations by Washington state and others concerning Zenefits allegedly selling insurance policies through unlicensed agents. If found guilty by Washington regulators, Zenefits could face a criminal fine of as much as $2.75 million, see some employees go to jail and potentially lose millions in commission dollars. While unlikely, that is what’s at stake.

Perhaps this situation is a result of incompetence and naiveté by the company’s management. Maybe. Then again, it could be the result of a culture that puts growth above adherence to the rules–an “act now and ask for forgiveness later” attitude–an approach sometimes applauded and rarely condemned in Silicon Valley and similar locales; unless, that is, it hurts the bottom line.

Not surprisingly then, Mr. Sacks informed employees on taking over as CEO that “a new set of values are necessary” for the company to continue considerable growth. He ended his letter proclaiming “This is Day 1.”

I don’t doubt Mr. Sacks’ commitment or intentions. But is Zenefits really likely to change its core values? Can it transform its culture? The problem, as I see it, is that the company, its values and culture reflects those of Silicon Valley. That is both a blessings and a curse.

They dream big in the Silicon Valley and Zenefits became big–one of the fastest growing enterprises in American business history. The company is funded by an A-List of Silicon Valley heavyweights. As of May 2015 Zenefits became the single largest investment of Andreeson Horowitz, one of the Valley’s most august venture capital firms. Several of its board members are Silicon Valley royalty.

The Valley values speed, innovation and disruption (“worship” might be a better word). While I’ve questioned whether Zenefits’ business model is innovative, the fact remains, the company has quickly shaken up more than one established industry.

However, being of the Silicon Valley also means Zenefits exists in a bubble (not the stock market crashing kind, but the island of unreality variety). For example, none of the executives listed on Zenefits’ site has any background in human resources, payroll or insurance sales. Yet those are what the company does. Outside the Silicon Valley this would raise eyebrows, maybe even create concern. Not there. Of course, they have direct reports with subject matter expertise, but none of the company’s top eight leaders (nine before Mr. Conrad’s departure) does? Looks like a bubble to me.

Mr. Sacks is a Silicon Valley rock star. In a December 2014 Pando’s article reporting Mr. Sacks joining Zenefits as chief operating officer Mr. Conrad was quoted as saying “When you have an opportunity to hire LeBron, you hire LeBron.” And it was an apt analogy. Mr. Sacks is good. Extremely good. He was the first COO of PayPal and founding CEO of Yammer (purchased by Microsoft for $1.2 billion). He knows how to run a company–a Silicon Valley company.

It’s also true that Mr. Sacks has been COO and a board member of Zenefits for a year now. Doesn’t that make him part of the company’s “old” culture? As chief operating officer, did he have at least some responsibility for knowing of Zenefits’ compliance problems? Maybe he did and he raised the alarm internally months ago. Maybe.

And that’s where Zenefits is at the moment, stuck in a vortex of maybes. Maybe it takes an insider to lead the company outside the Silicon Valley bubble. Maybe it takes someone who has seen the company’s failure to understand what can no longer be overlooked or ignored. Maybe Zenefits can both grow and follow rules. Maybe the company can swagger less and execute better.

Maybe. Who knows? Until we it’s clear Zenefits has the willingness and ability and to change, perhaps a bit of skepticism is in order. Maybe.

Zenefits Compliance Problems Cost Them a CEO — and Perhaps Millions

Things happen fast in the start-up world. Earlier today I wrote a LinkedIn post on how Zenefits’ compliance challenges in Washington state could cost the company millions of dollars in lost commissions. While noting that it was only a matter of time before someone at Zenefits lost their job over the situation, I had no idea at the time that Zenefits CEO Parker Conrad would resign today citing the compliance problems.

In a press release cited by announcing Mr. Conrad’s departure, Zenefits new CEO (and until now, its COO) David Sacks, declared” I believe that Zenefits has a great future ahead, but only if we do the right things. We sell insurance in a highly regulated industry. In order to do that, we must be properly licensed. For us, compliance is like oxygen. Without it, we die. The fact is that many of our internal processes, controls, and actions around compliance have been inadequate, and some decisions have just been plain wrong. As a result, Parker has resigned.” (The entire press release is worth reading).

The loss of a founder and CEO is another cost Zenefits will pay for their alleged failure to comply with states’ insurance laws. I don’t believe they’re done paying for their mistake, however.

What follows is a slightly edited version of my my earlier LinkedIn article I had prepared for posting on this blog tomorrow morning under the title:

A Zenefits Felony Conviction Could Cost Company Millions in Commissions

Washington regulators are investigating Zenefits’ alleged use of unlicensed agents selling insurance policies in the state. This is not only embarrassing for a company as brash and boastful as Zenefits, but the company’s finances could be substantially impacted, too. Not just because, if found guilty of this felony, Zenefits could face a multi-million dollar fine. The far greater risk to Zenefits is the prospect of losing commission income — a lot of it.

William Alden at BuzzFeed News has done a great job pursuing the story of Zenefits’ unlicensed sales. Now Mr. Alden is reporting that, based on public records it seems “83% of the insurance policies sold or serviced by the company through August 2015 were peddled by employees without necessary state licenses ….”

The potential fallout is quite substantial even though only a small number of sales are involved–just 110 policies out of 132 sold or serviced by Zenefits in Washington between November 2013 through August 2015. “Soft dollar” costs include a damaged brand due to the bad press, distractions at all levels of the company, and needing to address whether the company is ignoring other consumer protections.

Then there are the hard costs. 110 policies times the maximum $25,000 per violation Washington can impose means fines of up to $2.75 million. Financial penalties imposed by other states could add to this figure. While paying a $2.75 million fine is no laughing matter for a company losing money every month, this represents less than 0.5% Zenefits has raised from investors. However, the legal fines are, potentially, just the tip of the proverbial iceberg. As Mr. Alden points out, the fallout from this investigation could result in carriers dumping Zenefits and that could cost the company far more than any criminal fines.

Carriers require agents to meet several requirements before contracting with them and agents must continue to meet these requirements to keep the agreement in-force. Common provisions include being appropriately licensed, maintaining adequate errors and omissions coverage, and not committing felonies or breaching fiduciary responsibilities. Fail to meet any of these requirements and agents can find their contract terminated for cause.

Terminations for cause usually allow insurance companies to withhold future commissions from the agent and, depending on the specific terms of the contract, from the agent’s agency as well. If an agency or agent knows or should have known they were in violation of contract terms when executing the agreement, carriers may be able to rescind the contract and demand repayment of commissions already paid out.

Being found guilty of a felony in Washington state could allow a carrier–any carrier, anywhere in the country–to terminate Zenefits’ agent contract for cause. Rumor has it that only about half of Zenefits’ revenues now come from insurance commissions. Late last year Zenefits CEO Parker Conrad claimed the company was on track to earn $80 million in 2015. So, let’s see, millions times 50% … carry the one … yeah, this hurts. A lot.

A nuclear outcome is highly unlikely. The Washington state investigation into Zenefits is ongoing and Zenefits, to date, has been found guilty of nothing.

Even if Washington regulators find Zenefits committed a felony, for reasons described in a previous post, the outcome is highly unlikely to be a fatal blow to the company. Insurance regulators have considerable leeway in determining fines and penalties. Absent proof that Zenefits knowingly and intentionally violated state law or that consumers experienced actual harm, the Washington State Department of Insurance is likely to conclude this situation resulted from incompetence. They might then impose a modest fine on Zenefits and subjected the company to enhanced review of their licensing practices for a few years.

Let’s put this in perspective. Richard Nixon resigned the presidency as the result of what started off as a two-bit break-in. That kind of cascading escalation is extremely rare. What we’re seeing unfold in Washington state is probably not Zenefits’ Watergate moment.

Zenefits has already paid a small price for what they’ve allegedly done. I’m guess the whole mess has been a bit distracting to management. And the fact remains: mishandling more than 80% of their sales in a state is a sign of immense ineptitude, arrogance, or both. Having this reality aired publicly is not good for Zenefits’ brand and resources will need to be expended to make sure it doesn’t happen again. I’m not aware the company has fired anyone as a direct result of their lax licensing controls, but that could happen.

As a result of this fiasco, Zenefits has already taken down their controversial broker comparison pages in which the company used carefully selected criteria to compare themselves to community-based agents. (I guess they were reluctant to add “being investigated for multiple felonies” as one of the comparison points). This is a small sacrifice as the comparison page was likely an attempt to enhance their search engine optimization rather than an effort to take business from their competition.

Zenefits has paid a small price. The open question is, how large a price will the company ultimately pay? For that, it will be well worth following Mr. Alden’s future stories.


When a Penalty is not a Penalty

The Affordable Care Act requires most Americans to buy qualifying health insurance coverage. Fail to comply with this mandate and there’s a financial penalty waiting for you come tax time. But when is a penalty not a penalty? When is a mandate not a mandate? Hey kids, let’s do some math.

The penalty for going uninsured in 2016 is $695 per adult and $347.50 per child up to a maximum of $2,085 or 2.5% of household income, whichever is greater.

To determine the cost of coverage we’ll use the second-lowest silver plan available in a state. That’s the benchmark used to calculate ACA subsidies and in 2015 silver plans comprised roughly 68% of policies sold through an exchange. Even more important, I found a table showing the cost of the second-lowest cost Silver plan for 40 year olds by state, but I couldn’t find a similar table for other metallic levels.

The least our 40-year-old could spend on the second-lowest Silver plan this year is $2,196 in New Mexico; the highest premium is $8,628 in Alaska. The median average is $3,336. Divide the penalty by the premium and you get 32% of the cheapest premium and 21% of the median average premium. Put another way, paying the penalty saves our 40-year-old  consumer $1,500 in New Mexico and over $2,600 in the mythical state of median average.

I did find a table showing the national average premium a 21-year-old would pay for a bronze plan: $2,411.  In this situation the $695 penalty amounts to just 29% of the policy’s cost, a savings of over $1,700.

The purpose of this post is not to encourage people to go uninsured. I think that’s financially stupid given the cost of needing health insurance coverage and not having it. And, personally, I support the individual mandate. I also understand the political obstacles to establishing a real penalty for remaining uninsured.

However, I also believe the individual market in this country is in trouble. (More on this is a later post). Adverse selection is a contributing cause to this danger. The individual mandate is supposed to mitigate against adverse selection. The enforcement mechanism for that mandate, however, is a penalty that, for many people, is no penalty at all.

That’s not just my opinion. That’s the math.

A version of this article was originally posted on LinkedIn.

Is This Reform a Sham or Just Naive?

At some point during the Republican debate in New Hampshire Saturday night a candidate will call for allowing consumers to buy health insurance offered in other states. Apparently all the remaining presidential contenders support this as part of repealing and replacing the Affordable Care Act. Unless I’m missing something, however, this proposal makes no sense and won’t work.

The idea is appealing at first glance. Enabling consumers to buy health insurance available in another state increases choice and competition. Greater choice helps consumers find the plan that best fits their needs. Greater competition means they pay a lower price for their coverage. So far so good.

Look more carefully, however, and problems with this approach quickly become apparent.

Republicans being Republicans, the candidates are not calling for federal regulation of health insurance. They would still have state laws and regulations govern carriers. Which complicates things. While state regulatory structures need to be compatible with the Affordable Care Act, there’s still a lot of variety among the states.

These differences may be over treatments and services benefits policies must cover, how premiums are calculated, what reserves carriers must maintain, the size and nature of their provider network, and what consumer protections they provide their citizens. And so on.

If a Texas consumer buys a Connecticut carrier’s health plan, which state’s laws would apply? If the answer is Texas, then this reform does nothing: today carriers can offer policies outside their home states, they just need to meet the regulations imposed by the purchaser’s home state. Aetna, Anthem, Cigna, Humana, Kaiser, and United Healthcare are among the many carriers that sell policies in multiple states today.

Things get interesting if the answer is Connecticut, however. Leave aside the challenge a Texan faces in enforcing Connecticut consumer protection laws. Few carriers would domicile in Connecticut as their insurance laws are generally considered tougher than average. Instead, most health plans would seek out the state with the most insurer-friendly regulations and lowest reserve requirements. Just as South Dakota made itself attractive to issuers of credit cards and Delaware popular with C-Corporations, some state will become the favorite location for health insurance companies to call home.

In addition to opening the door to weakened consumer protections, advocates of empowering consumers to buy out-of-state policies display a profound ignorance of how health insurance works. Take just one example: networks. They matter; a lot. Under the ACA 80% of premiums an insurer collects for small group and individual policies must go towards medical expenses; that percentage increases to 85% for policies sold to larger companies. Which means health insurance premiums are strongly and directly impacted by how much insurers pay doctors and hospitals.

Carriers able to negotiate deep discounts from providers will be well priced; those that don’t won’t be. Doctors and hospital discounts are based in large part by how many patients the carrier can deliver to them. Carriers spend millions developing a strong network with the deepest discounts possible. Physicians and hospitals tend to be local, which means even national networks are cobbled together state-by-state, if not city-by-city. A New Yorker may like a policy available in New Hampshire (at about 1:25 into the clip). Unless the New Hampshire insurer has invested the time and resources necessary to build a competitive New York network the policy is worthless there.

This means whether a consumer wants to buy a medical policy available in another state is irrelevant, regardless of the wishes of politicians. What matters is if the carrier wants to sell policies in that consumer’s state. And if they do, they already can.

The first time I heard a presidential candidate call for this cross-border buying reform was in 2008 by then Republican presidential nominee Senator John McCain. How this nonsensical reform proposal has survived this long is a mystery. Either I’m missing something (I admit, a very real possibility) or journalists don’t know enough to call the candidates out on this sham of a reform so they continue to put it out there. If it’s the former, please educate me. If it’s the latter, however, maybe someone could sneak this post to one of the debate moderators?

A version of this article was originally posted on LinkedIn.

The Endangered Individual Health Insurance Market

And then there were none? The individual health insurance marketplace is endangered and policymakers need to start thinking about a fix now, before we pass the point of no return.

Health plans aren’t officially withdrawing from the individual and family market segment, but actual formal withdrawals are rare. What we are witnessing, however, may be the start of a stampede of virtual exits.

From a carrier perspective, the individual and family health insurance market has never been easy. This market is far more susceptible to adverse selection than is group coverage. The Affordable Care Act’s requirement guaranee issue coverage only makes adverse selection more likely, although, to be fair, the individual mandate mitigates this risk to some extent. Then again, the penalty enforcing the individual mandate is simply inadequate to have the desired effect.

Add to this higher costs to administer individual policies relative to group coverage and the greater volatility of the insured pool. Stability is a challenge as people move in-and-out of the individual market as they find or lose jobs with employer provided coverage. In short, competing in the individual market is not for the faint of heart, which is why many more carriers offer group coverage than individual policies. Those carriers in the individual market tend to be very good at it. They have to be to survive.

Come 2014, when most of the ACA’s provisions took effect, these carriers suddenly found their expertise less helpful. The changes were so substantial historical experience could give limited guidance. There were simply too many unanswered questions. How would guarantee issue impact the risk profile of consumers buying their own coverage? Would the individual mandate be effective? How would competitors price their products? Would physicians and providers raise prices in light of increased demand for services? The list goes on.

Actuaries are great at forecasting results when given large amounts of data concerning long-term trends. Enter a horde of unknowns, however, and their science rapidly veers towards mere educated guesses. The drafters of the ACA anticipated this situation and established three critical mechanisms to help carriers get through the transition to a new world: the risk adjustment, reinsurance and risk corridor programs.

Risk corridors are especially important in this context as they limit carriers’ losses—and gains. Carriers experiencing claims less than 97% of a specified target pay into a fund administered by Health and Human Services; health plans with claims greater than 103% of this target receive funds. You can think of risk corridors as market-wide shock absorbers helping carriers make it down an unknown, bumpy road without shaking themselves apart.

You can think of them as shock absorbers. Senator Marco Rubio apparently cannot. Instead, Senator Rubio views risk corridors as “taxpayer-funded bailouts of insurance companies.”

In 2014 Senator Rubio led a successful effort to insert a rider into the budget bill preventing HHS from transferring money from other accounts to bolster the risk corridors program if the dollars paid in by profitable carriers were insufficient to meet the needs of unprofitable carriers. This provision was retained in the budget agreement Congress reached with the Obama Administration late last year. Senator Rubio in effect removed the springs from the shock absorber. The result is that HHS could only reimburse carriers seeking reimbursement under the risk corridors program just 12.6% of what they were due based on their 2014 experience. This was a significant factor in the half the health co-operatives set up under the ACA shuttering.

Meanwhile individual health insurers have taken a financial beating. In 2015 United Healthcare lost $475 million on its individual policies. Anthem, Aetna, Humana and others have all reported substantial losses in this market segment. The carriers point to the Affordable Care Act as a direct cause of these financial set-backs. Supporters of the health care reform law push back on that assertion, however. For example, Peter Lee, executive director of California’s state-run exchange, argues carriers’ faulty pricing and weak networks are to blame. Whatever the cause, the losses are real and substantial. The health plans are taking steps to staunch the bleeding.

One step several carriers are considering is to leave the health insurance exchanges. Another is to exit the individual market altogether; not formally, but for virtually. Formal market withdrawals by health plans are rare. The regulatory burden is heavy and insurers are usually barred from reentering the market for a number of years (five years in California, for example).

There’s more than one way to leave a market, however. A method carriers sometimes employ is to continue offering policies, but make it very hard to buy them. Since so many consumers rely on the expertise of professional agents to find the right health plans, a carrier can prevent sales by making it difficult or unprofitable for agents to do their job. Slash commissions to zero and agents lose money on each sale.

While I haven’t seen documentation yet, I’m hearing of an increasing number of carriers eliminating agent commissions and others removing agent support staff from the field. (Several carriers have eliminated field support in California. If you know of other insurers making a similar move or ending commissions please provide documentation in the comments section).

So what can be done? In a presidential election year not much legislatively. Republicans will want to use an imploding individual market to justify their calls repealing the ACA altogether. Senator Bernie Sanders will cite this situation as yet another reason we need “Medicare for all.” Former Secretary of State Hillary Clinton, however, has an incentive to raise the alarm. She wants to build on the ACA. Having it implode just before the November presidential election won’t help her campaign. She needs to get in front of this issue now to demonstrate she understands the issue and concerns, begin mapping out the solution and inoculate herself from whatever happens later this year.

Congress should get in front of the situation now, too. Hearings on the implosion of the individual market and discussions on how to deal with it would lay the groundwork for meaningful legislative action in 2017. State regulators must take notice of the endangered individual market as well. They have a responsibility to assure competitive markets. They need to examine the levers at their disposal to find creative approaches to keep existing and attract new carriers into the individual market.

If the individual market is reduced to one or two carriers in a region, no one wins. Competition and choice are consumers’ friends. Monopolies are not. And when consumers (also known as voters) lose, so do politicians. Which means smart lawmakers will start addressing this issue now.

The individual health insurance market may be an endangered species, but it’s not extinct … yet. There’s still time to act. Just not a lot of time.

Zenefits’ Problems Keep Growing. So What?

Zenefits, the Cloud HR company that seeks to disrupt the world of community-based benefit brokers, has sailed into a sea of troubles of late. (And I think the previous sentence just violated some metaphor/single sentence law, my apologies). These problems are of their own making, which brings an element of justice to the situation. But it’s important to keep their current situation in perspective when considering their long-term prospects.

I offered some thoughts on this over at LinkedIn under the title “Zenefits’ Felony Investigation: Will It Matter?” back on November 30th. The response was quite …. strong. So I thought I’d share the post here for those of you who don’t hang out over there.


A quick update on my post “Zenefits Problems Real, But Not Fatal.” Someone called that my “Schadenfreude article”as it laid out why many benefits brokers took pleasure in the problems raining down on Zenefits at the time: missing the revenue projections their CEO, Parker Conrad, made earlier in 2015; and Fidelity Investment’s resulting devaluation of the company’s worth by 48% among others. The post also explained why Zenefits would survive those woes.

Now comes news that Zenefits is under investigation for using unlicensed agents in Washington State and other states, giving brokers even more fuel for enjoying Zenefits’ distress. And the distress is serious: knowingly selling insurance without a license is a felony in Washington, punishable by a fine of up to $25,000 per incident or 10 years in jail. Mr. Conrad famously told Fortune that “All of the existing brokers today are all fucked.” So, as with the financial miss and marked down valuation, it’s not surprising to hear brokers rhetorically asking, “Who’s screwed now, Mr. Conrad?”

If Zenefits is guilty of knowingly using unlicensed agents to sell insurance policies, they will be, and should be, punished. Most likely that means a fine–a Zenefits manager would need to be in blatant and gross violation of the law to justify jail time, especially if no consumers harm arose from the violation.

Time will reveal how this situation came about and what it means for Zenefits. As of today, the company is innocent and remains so unless and until regulators prove their case. Zenefits isn’t outright denying the charge. In a statement to BuzzFeed, Zenefits seems to claim any problem is more a matter of timing. “When we started Zenefits, we followed a practice common to many small independent brokers of having each broker licensed in their home state and having the agency itself also registered in all 50 states so as to allow out-of-state sales. As we grew and heard from regulators that they wanted each licensed broker individually to acquire a non-resident license, we set out to do just that.” Note the “set out to do just that.” Maybe they were going through the states alphabetically and simply hadn’t gotten to “W” yet?

(Interesting how when they launched, Zenefits’ leadership colorfully differentiated themselves from “traditional” brokers, but now are claiming to be just part of the crowd. The spin required to impress venture capitalists apparently differs from that aimed at appeasing state regulators. But I digress.)

Zenefits’ regulatory problems arise alongside anecdotal claims of a persistency challenge. These are brokers describing how they lost a client to Zenefits only to regain the case a short time later. This fits the narrative many brokers have (and which I share) that most employers need and want the services of a community-based broker, something Zenefits can’t and doesn’t deliver.

Zenefits doesn’t publish their lapse data and has no need to. So it may be the company has no retention problem. Still, Zenefits executives are keeping busy (some might say distracted).

  • They’ve launched a new payroll service, which creates a whole new set of business and regulatory issues to deal with.
  • The regulatory investigation in Washington state may soon expand to other states.
  • Their growth failed to fulfill Mr. Conrad’s projection, but still creates growing pains.
  • A significant and reputable investor lowered their estimation of the company’s worth–just a few months after making an investment.
  • Direct competitors are raising capital and aggressively marketing direct-to-consumer services comparable to Zenefits.
  • Independent brokers are increasingly turning to tools that help them compete more effectively against the company. (Full disclosure, I’ve co-founded a company bringing such a platform to market, NextAgency, early next year).

All of which adds up to tough times in Zenefits World.

So what? Executives at Zenefits aim to build a huge company. They raised over $580 million to do just that. While they’ve spent a significant amount, they claim to still have a large cash cushion, probably enough to survive these challenges as well as some yet unknown. Right now they’re on the receiving end of bad press. If there are fines to pay for using unlicensed agents, Zenefits will pay it and get more bad press. Then they’ll move on.

Even if their peak valuation of $4.5 billion is marked down again, it’s not a big deal unless they need to raise more capital and, according to Mr. Conrad, that’s not in their plans. Even a $1 billion valuation makes them a Silicon Valley unicorn. True, their current investors and employees would be unhappy (extremely unhappy), but the company would survive and remain a market presence. (Personally, I think even a $1 billion valuation is overly optimistic, but time will tell).

And maybe there’s a silver lining. Perhaps all of the bad press Zenefits has earned over the past few weeks will teach their executives humility.

I doubt it, but that would be nice.

In the meantime, brokers should not make the erroneous assumption that a major competitor is imploding. First, because Zenefits isn’t imploding. Second, because even if they did, there’s plenty of others striving to take their place. Have you met Namely and Gusto?