Schafer: Strategic error led to exit from MNsure

It's hard to see how the exit of PreferredOne last week could be played as a failure for MNsure.

After all, the MNsure state health insurance exchange is just another market. The low-price player wasn't making any money, and it decided to get out.

That's sort of the way markets are supposed to work.

In fact, what happened to PreferredOne was so predictable that had this not taken place on the politically red-hot MNsure exchange, the decision may not have even made news.

PreferredOne is not providing any explanation beyond a letter to MNsure from its CEO that said continuing to offer coverage through the exchange "is not sustainable."

After looking into the company's filings and talking to others in the market, that seems to be a fair assessment.

It's not MNsure that's really the problem, though. It's more what PreferredOne did to itself.

PreferredOne is a very well-regarded, relatively small health plan based in Golden Valley that's best known for insuring groups brought in by employers.

Like all health insurers, Preferred­One has to operate in a market where no one really knows the cost of a new customer for awhile. A snowmobile maker pretty much knows what the machine costs the day the sale is booked, but not so in insurance.

Sure, the insurer gets to collect the premiums, but what it also gets is an unknown liability it tries to estimate.

Health insurance is also about as regulated as a market can get and still be a market, but in Minnesota the players did get to decide how aggressive to be on MNsure. The problem was that MNsure was an exchange no one had used before. Insurers faced a lot of unknowns in how to price the plans, which were available in tiers rated platinum, gold, silver and bronze.

In a news release a year ago, PreferredOne was pleased to announce that it offered "the lowest-cost individual and family health care insurance plans available at all metal levels in eight of the nine MNsure pricing regions."

PreferredOne had made its decision. It was going to grab some market share.

It worked splendidly, too. The people who managed to hack their way through and get signed up on the barely functional MNsure system turned out to be price-sensitive shoppers, and PreferredOne got most of them.

As of the latest data, Preferred­One has more than 24,000 people, or more than 50 percent of the MNsure folks in a private plan.

So how did taking the low-price position in an unproven market work out? About as you'd expect.

Based on a filing of PreferredOne Insurance Co. as of the end of the second quarter, the company saw its individual memberships shoot up to 80,000, including both the MNsure customers and others. That compared with fewer than 15,000 at the end of 2013.

If you're the sales manager, maybe that's news to celebrate. But Preferred­One also got 65,000 more little liability tails.

The individual health premiums written through the end of June were $87.6 million, but the expense incurred for health care services booked in its financial statements was just under $115 million.

For those keeping score, that's $1.31 paid out for every dollar coming in, a medical loss ratio of 131 percent. Mention a loss ratio like that to anybody who works for a health insurer, and the color will drain from their face, their shoulders will slump and they will start mumbling incoherently.

It's important to note it won't be nearly that bad for PreferredOne in the end, because PreferredOne's filing also shows a total premiums earned line that includes, as best as can be determined, the expected value of some risk sharing that was also written into the federal Affordable Care Act.

But as recorded on June 30 the total is not nearly enough to cover the provision for health care services already on the books, even if all that risk-sharing money is actually collected.

It's perhaps no surprise, then, that the owners of PreferredOne Insurance Co. — half-owned by Fairview Health Services and the rest split between North Memorial Health Care and PreferredOne Physician Associates — have already put in $10 million of capital through the end of June.

If PreferredOne were the size of Blue Cross and Blue Shield of Minnesota, no one would have been happy about a rough first year, but there also would have been no rush to quit the market. The company would've raised prices for renewals and some ground would get re-covered over the next couple of years.

That was less of an option for PreferredOne, so now the larger insurers will try to pick up more business.

Blue Cross and Blue Shield's spokesman said last week that it intends to be in the market in all 87 Minnesota counties for next year. And an executive with Minnetonka-based Medica, which clearly didn't really try to grab much business on MNsure last year, said it's planning to work harder for 2015.

PreferredOne did complain of the administrative costs of working with MNsure, a valid complaint. When MNsure CEO Scott Leitz says, as he did in a brief conversation last week, that "it's an improving system, not a perfect system," he's acknowledging that insurers will still have to do more work than they usually do.

The insurers planning to come back mostly characterize those issues as just the hassles typical of a start-up market and expect the situation to get a lot better.

"This open enrollment period will probably be tough," said Dannette Coleman, Medica's senior vice president of individual and family business. "But long-term this shouldn't be an issue."

Republican candidates for statewide office, of course, were all over news of PreferredOne pulling out. Hennepin County Commissioner Jeff Johnson, running for Gov. Mark Dayton's job, suggested it was evidence of "breathtaking incompetence" on the part of the governor.

There might've been incompetence involved in the case of PreferredOne on MNsure over the past year or so. Not enough is known to say for sure.

But if so, it sure wasn't in Gov. Dayton's office.

lee.schafer@startribune.com • 612-673-4302