Why Colorado is taking a gamble with failing insurer Friday Health Plans

The concern is over Friday Health Plans, the start-uppy, for-profit insurer that aimed to use technology to operate in leaner, more consumer-friendly ways. To industry analysts, these kinds of companies are known as "insurtechs."

After raising hundreds of millions of dollars in venture funding, Friday's bubble popped earlier this month, continuing a trend of nose-diving newcomers to the state's insurance market.

Colorado regulators are hoping Friday can limp along in the state and continue paying claims through the end of the year. If it can, it means Friday's customers in Colorado won't need to find a new insurance plan this year and end up in the unenviable situation of having to pay two deductibles in the same year.

Insurance Commissioner Michael Conway said Friday's Colorado arm appears to have enough cash on hand to continue operating through the end of the year.

"They have the capital to pay the claims that we expect them to have to pay over next six months and into the run-out," Conway said.

This is not the case elsewhere, where Georgia and Nevada have most recently joined the parade of states placing their local divisions of Friday into receivership and liquidating their assets.

But Conway's statement comes with two big caveats. The first is that regulators must verify Friday's Colorado division actually has the money it says it does. Conway said his team is working on that now.

The second caveat is that, even if Friday has enough money locally to pay its members' medical bills, it could still struggle to do so if its parent company can't pay all the assorted vendors it uses to process those claims. This concern was raised by one national expert, the health care consultant Ari Gottlieb.

"The right thing for Colorado to do would be to follow Georgia's example and take over the plan and then shut it down," Gottlieb, a principal at A2 Strategy Group, told the industry publication Fierce Healthcare. "They are basically hoping the math works and vendors continue to service the plan, even when they are potentially not getting paid.

"Colorado regulators are trying to make it work for members in the state, but it is hard to see how ultimately that decision will end well."

Gottlieb could not be reached for additional comment, and Conway said Colorado is working with other states where Friday operated to come up with a solution for this problem.

"It takes a lot of money to enter the insurance industry."

Friday is just the latest insurtech to hit the skids, both in Colorado and nationally.

Two others, Bright Health and Oscar Health, pulled out of the Colorado market late last year amid nationwide struggles. Bright and Oscar are also for-profit.

Friday is headquartered in Colorado, with a large base of operations in Alamosa, owing to its 2017 takeover of San Luis Valley-focused nonprofit insurer Colorado Choice Health Plans. So Friday's collapse has extra significance in Colorado because it means the loss of hundreds of jobs in Alamosa.

But the story is largely the same for all the insurtechs: Their struggles have to do with the cold reality of the health insurance world, which is notoriously difficult to break into.

"It takes a lot of money to enter the insurance industry," said Paul Ginsberg, a professor of health policy and management at the University of Southern California who has extensively studied the insurance market.

The largest players in the market — companies like Anthem, Kaiser Permanente and United Healthcare — have decades of experience, as well as formidable reserves and longstanding relationships with hospitals and doctors, with whom it needs to be able to strike good deals in order to offer plans at affordable rates.

Insurtechs, operating like Silicon Valley startups, sought to gatecrash the stodgy world of health insurance by using technology and counting on venture capital funding to provide it with the needed reserve funds. (Insurance companies, in Colorado and other states, are required to have a minimum amount of money in the bank, both to cover anticipated claims but also to hedge against the unexpected, like, say, a global pandemic.)

They often marketed themselves as fresh, easy to use and more affordable. And they in particular targeted their products to the individual market — where people buy insurance on their own and often shop on exchanges that are like Amazon for health care coverage. Surveys have long shown that, for the large majority of people shopping in the individual market, price is the top concern.

This sets the individual market apart from the group markets, where companies buy plans for their employees. In those markets, an insurer's reputation and network of doctors and hospitals weigh heavily.

"You don't need that reputation or that size of network to break into the individual market," said Rick Rush, a health care actuary and the managing partner of the consulting firm GERICK. "You just need a competitive price."

But, as Friday's experience shows, the insurance industry can be a difficult place to survive even when you succeed.

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The rapid rise — and fall — of Friday Health Plans

Friday grew astonishingly quickly.

For instance, after launching in the 2021 plan year in Texas, the company had more than 260,000 customers in the individual market in the state within two years, out of about 330,000 customers nationwide. Friday has around 30,000 customers in Colorado.

But that success brings new challenges. The more members a health insurer has, the more reserve money it needs to hold in the bank. And, when accumulating members so quickly, it is difficult to amass those reserve funds fast enough out of members' premium payments, meaning the fast-growing insurer needs to have other places it can go to raise money.

The other problem is that, with a whole bunch of new members coming in, it can be difficult to predict how much it will cost to cover them, Rush, the actuary, said. Are all these new members really healthy? Do they have complex medical needs?

"They're trying to break in on a highly regulated, low profit margin line that has a lot of volatility," Rush said.

In a statement on its website announcing the wind-down of its business, Friday alluded to the challenges of too much, too soon, saying that the company had "been unable to scale our financial infrastructure to match the pace of our growth and secure the additional capital required to run our business."

(The company did not respond to a previous Colorado Sun request for comment.)

There are hints, though, that Colorado regulators have for years been skeptical of Friday's business plans.

One way to grow as quickly as Friday did is to offer the lowest-priced plans in the market. That allows you to monopolize the search results on a given state's health insurance exchange.

When a consumer shops for a plan on the exchange, whether that is the federal exchange, HealthCare.gov, or a state-based exchange like Connect for Health Colorado, the search results can be sorted by price — and sometimes automatically are. The cheapest plans are the ones you see first.

That makes the first page of results valuable real estate, the same way it is with a Google or Amazon search. And it has led to concerns that insurers could be trying to game the system by under-pricing their plans and then hoping to make up the shortfall through market share and outside investment. (Friday believed it needed to raise $60 million to $100 million to keep operating.)

This may explain one quirk of Friday's rates in Colorado in recent years — twice in the past four years, state regulators told Friday that it had to charge more for its plans than it proposed.

For this year, Friday told the state Division of Insurance that it wanted to raise its premium prices by an average of 24.2%. After reviewing the filing, the division said Friday needed to instead raise its rates by 25.1%.

Similarly, for 2021, Friday asked to sell its plans for an average of 12.2% less than it had in 2020. The division raised that to only 5.1% less. Even still, the company lost money in 2021 in Colorado, according to one recent regulatory filing, saying that its 2021 prices "resulted in insufficient premiums and led to Friday operating at a loss."

To Ginsburg, the USC professor, the follies of Friday and other insurtechs shows the naivete of the startups.

"I think all of these companies thought that they had a really neat idea," he said. "And probably what happened was that many of the ideas either weren't that good or maybe some of the ideas were fairly easy for the large insurance companies to do on their own if they were interested."