NYC Citibike's Catastophic Success & Obamacare
NYC CitiBike, New York's year-old bike share program, is being crushed by its catastrophic success. As Felix Salmon explains, CitiBike has sold many more annual subscriptions ($95/year) - and far fewer daily passes ($9.95/day) - than expected. The problem is that the business model was built upon the expectation that tourists paying $10/day would subsidize local commuters paying under 30 cents/day. Without the cross-subsidy from the daily passes, the system is going broke.
Below the fold, I explain why CitiBike has a broken business model and how it provides a tangible example of the danger in Obamacare from too much demand from the wrong type of subscribers.
CitiBike Is A Victim Of Its Success With Annual Subscribers
Before CitiBike launched in the Spring 2013, it expected to generate 60,000 annual subscriptions in the first year. Within the first 100 days, there were already 80,000 annual subscribers. Today, there are more than 100,000 annual subscribers. For $95 per year, these subscribers can take a bike from any of the 330 stations in Manhattan (below 60th Street) and Brooklyn (the gentrified parts) for up to 45 minutes. The system requires the bike to be returned to a docking station within 45 minutes (or face overtime charges), but the bike can be returned to any dock at any of the 330 stations.
CitiBike has quickly become a commuting tool for NYC residents. A subscriber is issued a key (a plastic fob like a Starbucks loyalty card) that unlocks any available bike at a station. The user then has 45 minutes to get to her destination and find an open dock at a station and return the bike. The bike locks into place when it is returned, ready for the next user.
The first problem is that the morning and evening rush hours overwhelm the system each day. In the morning, CitiBike's annual subscribers gobble up bikes at far flung stations and migrate them to the business districts. By 9 am, each of the fifty bike docks in the high-intensity stations will be filled. CitiBike employees must unclog these stations by physically transporting bikes (in trucks and trailers) to more remote stations, so that docks can be opened up for additional riders. In the evening, Citibike commuters quickly exhaust the bikes available in the high-intensity stations, so Citibike employees have to restock the dock by transporting bikes from remote stations. Moving bikes through NYC traffic is a costly, labor-intensive process.
The second problem is that annual subscribers exact an enormous toll on the bike fleet. The number of trips and number of miles on NYC bikes has outstripped usage in London's system. Each additional trip increases the likelihood of a bike needing repair. Annual subscribers make more trips and cause more damage than tourist day pass users. Bike repairs are extremely costly and limit the number of bikes available for rent.
Because the user base has skewed so heavily to annual subscriptions, CitiBike has experienced far greater expenses than budgeted. Although revenues have hit projections, riders are using the bikes for far more than expected, leading to greater labor costs and repair costs. Each annual subscriber imposes far more than $95/year in costs on the system.
How CitiBike Models The Danger To Obamacare
Like CitiBike, the Obamacare business model relies upon cross-subsidization. Younger and healthier enrollees (like the Daily Pass CitiBike riders) will pay premiums that, on average, will be higher than their annual medical costs. Older and sicker enrollees (like CitiBike Annual Subscribers) will pay premiums that will not fully cover their cost to the system. Common sense tells you that the average healthy 25 year old consumes less doctor time and fewer hospital resources than the average 60 year old with a heart condition. Even with the higher premiums paid by older enrollees, the difference does not cover the additional costs imposed by the heavier users of the system.
In the days leading up to the end of Obamacare open enrollment, there was great public interest whether the system would meet its projection of 7 million enrollees. Despite a slow start, the 7 million goal was met and surpassed. Over 8 million people enrolled for Obamacare. The question is whether the demographics of the Obamacare population are sustainable. The early returns show that roughly 28% of Obamacare enrollees were between 18 - 34 years old, which has proven sustainable in Massachusetts.
Whether it is bike shares or health care, cross-subsidization means that the system depends not just on the raw number of customers, but the composition of the customer base.