Health Insurers Increase Debt in Wake of the ACA

Since 2011, U.S. health insurers have nearly doubled their borrowing levels due to the Affordable Care Act (ACA), according to a report by A.M. Best. With traditional health insurance products, insurers receive full premium payment every month before paying any claims. But that’s not the case with exchange products. In the first few years of the exchanges, insurers relied heavily on risk-adjustment, reinsurance, and risk corridors. The timing of paying direct premium subsidies fluctuated significantly. So health insurers had to pay the claims because their liquidity was under pressure. They turned to borrowing to alleviate this pressure. A.M. Best has not seen any significant rating pressures due to borrowing. However, heavy reliance on borrowed funds could put pressure on ratings if it reduces financial flexibility or slows the growth of capital and surplus. However, financial institutions see the use of borrowed funds as favorable since many top borrowing insurers are very big, highly capitalized, and highly rated, according to the report. 

Insurer Obamacare Losses Reach Billions Of Dollars After Two Years

Bruce Japsen ,

CONTRIBUTOR

I write about health care and policies from the president’s hometown

Opinions expressed by Forbes Contributors are their own.

After two years offering uninsured Americans subsidized products on public exchanges, health insurance companies have been hard-pressed to find financial success in this segment of the Affordable Care Act with losses reaching billions of dollars for the industry.

UnitedHealth Group UNH +0.77% lost more than $720 million on its public exchange business last year, and United is a small player in this market compared to Anthem ANTM +0.84%, which operates Blue Cross and Blue Shield plans in 14 states, and said money-losing Obamacare plans caused profits to fall 64% in the fourth quarterAetna AET +0.16%, which hopes to finalize its acquisition of Humana HUM -0.29% later this year, said last week individual coverage sold under the health law “remained unprofitable” last year.

The financial performance has come into view in the last two weeks following release of 2015 annual and fourth-quarter earnings.

A demonstrator in support of  the Affordable Care Act holds an “ACA is here to stay” sign outside the Supreme Court after justices ruled 6-3 to save Obamacare tax subsidies on June 25, 2015. Photographer: Andrew Harrer/Bloomberg

Other Blue Cross and Blue Shield plans, some nonprofits and others owned by policyholders, are also reporting hundreds of millions in losses on health plans they sell on public exchanges. For example, Blue Cross and Blue Shield of North Carolina has reported losses of more than $400 million through last year and Health Care Service Corp., which owns five Blue Cross plans including those in Illinois and Texas, lost more than $240 million in 2014 and remained unprofitable in its public exchange business last year. Health Care Service has yet to disclose 2015 financials for its nearly 2 million members in its individual business that includes Obamacare enrollment, a company spokesman said.

For insurers, the problem has largely been a major increase in medical expenses from these new patients, who were previously uninsured. From an actuarial standpoint, the health plans say they didn’t know what they would be getting and therefore needed more healthy people to buy premiums to cover the costs of the sick. So far, medical expenses are getting the upper hand. For example,Anthem’s fourth-quarter “benefit expense ratio” was 87% compared to 84.5% in the year-ago period.

But insurers, for the most part, see 2016 as a potential breakout year as they get a handle on pricing and narrow provider networks to better control costs.

Anthem CEO Joe Swedish, who has complained rivals have underpriced their products to get enrollment in the first two years, looks for the public exchange business to rebound following two years of pricing he’s described as “unsustainable.” Analysts say Anthem might even have stronger offerings following its acquisition of Cigna CI -0.04%, should that close later this year.

Data Insights from the 2016 ACA Marketplace

 

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Robert Wood Johnson offers the following observations about the Affordable Care Act Marketplace:

  • Carriers made adjustments in 2016 to reduce their exposure to high costs: In 2016, carriers attempted to minimize their exposure to high costs by reducing the number of plan offerings with out-of-network benefits, among other strategies. This change occurred at all metal levels and in all regions. The number of Silver plans that are HMOs or exclusive provider organizations (EPOs) increased from 61% in 2015 to 69% in 2016. The number of Gold plans declined compared to other metal levels. While the number of Silver plans increased 2.9%, the Gold plans declined by 8.7%. The number of Gold plans declined in most regions.
  • Regional price variation in narrowed: There was a geographic convergence in premium prices in 2016, as premiums rose far more in regions that had lower prices the prior year. Nationally, the distribution of average premium prices tightened in all rating areas. This pattern was less straightforward for deductibles, as many combinations of cost-sharing options are on the market.
  • Price variation increased within markets: Despite the reduced variation across markets, differences in premium prices increased within markets. The average premium price range increased from 2015 to 2016 in a rating area. This is true for all metal levels and all regions. The distribution has become more skewed, as maximum prices increased more than minimum prices. In 2016, a Blue or a national carrier offered the highest priced plan in a rating area about 75% of the time.
  • There are still large regional differences in plan design: Plans in the Northeast and West have a much broader range in premium prices and less variation in deductibles. Plans in the Midwest and South have a smaller range in premium prices and a far greater range in deductibles. There were some changes in these patterns from 2015 to 2016, but there are still important regional differences in plan design.
  • More regulated markets have higher premiums and lower deductibles:  Federally facilitated marketplaces with the most plan regulation—CA, CT, DC, MA, NY, RI, VT—had the highest premiums and lowest deductibles.

More product changes are likely in 2017. There is room for further reduction in broad network plans. Most entrants in 2016 primarily offer narrow network products. This will probably continue to vary regionally. We may also see further reduction in Gold plans, although carriers must sell Gold and Silver. There are indications that some carriers may reduce their Bronze offerings. The number of Bronze plans increased very little in 2016. There may be reductions in some markets in 2017. The actuarial value of Bronze and Silver plans seems to have grown closer in 2016, and average prices are quite close in many regions. While carriers have resisted government calls for standardization and simplification of plan offerings, the industry seems to be standardizing itself through potential reductions in product offerings.

Premium prices will converge further. While premium increases are expected, some regions are relatively under priced. A further reduction in regional differences will probably take place. Prices may converge at the levels seen in more regulated state-based marketplaces, which may be more appropriately priced.

The weaker markets are smaller, largely rural, have less carrier participation in 2016, fewer plans, and lower premiums. These markets may experience higher premium increases and continued low carrier participation, which will inhibit enrollment gains.

UnitedHealth Group announced that it will exit 26 markets and participate in three. The company has not announced a decision about five others. In states where UnitedHealth Group is exiting, the insurer was priced relatively lower than others, and there tended to be a higher-priced Blue plan in the marketplace. Exit states weak markets with fewer plans, less growth in the number of plans, a smaller range in premium prices, and below average premiums—despite average or above average premium increases from 2015 to 2016.

UnitedHealth Group may have concluded that, due to the small size and low level of activity in certain markets, there would not be enough additional enrollment to offset negative claims experiences, and that it would be hard to raise premiums enough to stop losing money with enrollees. If other carriers follow suit, weak markets may become weaker as they lose carriers and/or experience above average price increases. Humana seems to have positions in weak markets and is priced relatively low in many of them. Humana’s decisions about exiting markets suggests that it may be seeking to reduce its presence in weak markets.

Critical Illness and Accident Coverage Are Top Growth Products

Critical Illness, Accident Coverage

Over the next two to three years, voluntary critical illness insurance and accident/personal injury insurance are tied for first place as expected growth products for carriers. Hospital indemnity/supplemental medical, universal/whole life (UL/WL), and term life coverages round out the top five. Hospital indemnity/supplemental medical products are new to this list in 2016 while UL/WL jumped ahead of term life in this year’s survey. Short-term disability fell out of the top five for the first time in four years. Critical illness leads the pack in growth products for the voluntary worksite market; hospital indemnity/supplemental medical is second; and accident coverage is third.

Very few of the participating carriers rate any voluntary product as very profitable. However, AD&D, accident/personal injury and term life are listed most frequently. The majority of carriers say that their products have average profitability, which is similar to the 2012 and 2014 surveys. None of the respondents rated cancer insurance and long-term care insurance as profitable or financially attractive. For more information, visiteastbridge.com.

Patients Are Paying More, But Health Plans Are Not

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From 2004 to 2014, patient cost-sharing rose much faster than payments that health plans made for care, according to a report by the Kaiser Family Foundation. Deductibles and coinsurance rose considerably faster than the cost for covered benefits. Average payments toward deductibles still account for a relatively small share of total household budgets, they have been increasing rapidly.

Health care spending has grown fairly modestly in recent years. But, while out-of-pocket costs are growing, wages are remaining largely stagnant. Patients in large employer plans are paying more out-of-pocket. Deductibles are the most visible element of an insurance plan, which may help explain why consumers are showing concern about their out-of-pocket costs. The report reveals the following averages from 2004 to 2014:

  • Patient cost-sharing rose 77%, from $422 to $747.
  • Deductibles accounted for 24% of cost sharing in 2004 and 47% in 2014.
  • Enrollees saw a 256% increase in average deductibles from $99 to $353.
  • Coinsurance payments rose 107%, from $117 to $242.
  • Copays fell 26%, from $206 to $152. Copayments accounted for nearly half of the cost sharing payments in 2004, falling to 20% in 2014.
  • Payments by health plans rose 58%, from $2,748 to $4,354. Large employer plans covered 87% of covered medical expenses in 2004 and 85% in 2014.
  • Workers’ wages rose 32% from 2004 to 2014.

The increase in coinsurance may reflect the strong growth in plans that qualify a person to establish a health savings account; these plans are more likely to have coinsurance than copayments for physician services. Patients are more sensitive to the price of health care with deductibles and coinsurance than they are with copays, which are flat dollar amounts. Also, copays may add up over time while a deductible may need to be met at once, causing affordability challenges

Covered California Announces Contract Changes with Carriers


ContractCovered California adopted significant changes to its contracts with health insurers. The contract provisions were developed over the past year with consumer advocates, health plans, clinicians, other stakeholders, and subject matter experts. Plans must do the following for years 2017 to 2019:

• Ensure that all consumers select or are provisionally assigned a primary care clinician within 30 days of when their plan goes into effect.
• Exchange data with providers. This will enable physicians to be notified if their patients are hospitalized and track trends and improve performance on chronic conditions, such as hypertension or diabetes.
• Identify hospitals and providers that deliver poor-quality care or unwarranted high-cost care. Health plans will be expected to work with them to improve their care or lower their costs. Hospitals that don’t improve and don’t provide justification will be excluded from Covered California networks as early as 2019. Covered California will adopt a payment system for hospitals, such as the one employed by the Centers for Medicare and Medicaid Services (CMS). Over time, it will put at least 6% of reimbursement at risk or subject to a bonus payment based on quality performance.
• Manage high-cost pharmaceuticals and help consumers understand the effectiveness and costs of their drug treatments as well as any alternatives.
• Track health disparities, identify trends in disparities, and reduce disparities, beginning with four major conditions: diabetes, hypertension, asthma, and depression.
• Develop programs to identify and manage at-risk enrollees with requirements to improve in targeted areas.
• Provide tools to help consumers understand their diagnosis and treatment options and understand their share of costs based on the contracted costs of their plan.

Covered California will encourage plans to promote advanced models of primary care including patient-centered medical homes and integrated health care models, such as accountable care organizations. Also, Covered California is improving its patient-centered benefit design for 2017 plans. Outpatient care in Silver, Gold, and Platinum plans will not be subject to a deductible. Bronze plan consumers would get three outpatient visits that are not subject to the deductible, in addition to the free preventive visits. For 2017, Covered California is proposing to lower out-of-pocket costs for primary care and urgent care.

 

How the Affordable Care Act Challenges Insurers

In the past year, the Affordable Care Act (ACA) has had a more pronounced effect on large and small health insurance carriers, according to an A.M. Best report. The fact that the enrollment population continues to be older and riskier, is having a bigger negative financial effect than anticipated.

Publicly traded companies fared well, reporting an increase in earnings through Sept. 30, 2015. The ACA health insurer fee has affected insurers’ earnings. It was $11.3 billion in 2015 and is a similar amount for 2016. Since the fee is not tax-deductible, it has a greater effect on net income. Many insurers have compensated for the fee through premiums. Since some government-funded programs are more sensitive to premium increases, carriers have not been able to consistently pass the fee along in rates.

To alleviate the growing financial pressure, health insurers are looking at initiatives to control the cost of care, such as disease management programs and better care coordination. As a result, there has been increased collaboration with providers that can benefit all parties involved, including the patient.

Merger and acquisition activity accelerated in 2015 with several large transactions announced during the year. The desire for further diversification is driving the mergers and acquisitions among insurance companies and other health-related businesses. A.M. Best’s outlook for the U.S. health insurance sector was recently revised to negative from stable, largely due to earnings and capitalization pressures as a result of the ACA. The industry pressures are expected to continue to hurt earnings. The lower earnings and growth in premiums from increased membership will result in lower levels of risk-adjusted capitalization.

The merger and acquisition activity will bring additional earnings pressure to the bigger carriers since they will need to service higher debt loads. Since many of these pressures will not subside in the near term, A.M. Best says that there could be more negative rating actions on health insurers.

The report also explores other trends, such as how health insurers are viewing cyber risk, changing consumer demands, emerging member-focused insurers, rising pharmaceutical costs, and 2015 rating trends

New Law Aims to Reduce Insurance Company Insolvencies

Governor Brown signed Assembly Bill 553 into law. It establishes new oversight tools that are designed to reduce the number of insurance company insolvencies. It aligns state law with standards developed by the National Association of Insurance Commissioners (NAIC). New disclosures and filings will help the Commissioner determine the financial and corporate capacity of companies to conduct business in California, and identify troubled companies quickly enough to avoid insolvencies. It clarifies the role of state insurance departments as group-wide supervisors over multi-national insurance groups, as part of the Insurance Holding Company System Regulator Act. The bill takes effect immediately.

Hospitals Well Positioned for Insurer Consolidation

The for-profit hospital industry is well positioned to weather the wave of mergers and acquisitions (M&A) among the largest for-profit health insurers, but consolidation could have some important longer-term ramifications, according to Fitch Ratings.

M&A activity among health insurers is not likely to result in immediate price pressure for hospitals. In many markets, health insurers are already fairly consolidated. Recent actions by hospitals to build market presence will shore up negotiating power. However, it could hurt the competitiveness of smaller insurers in some markets. It could also accelerate the shift towards value-based payments for hospitals and other healthcare providers.

The merger of Aetna and Humana would create the second largest national for-profit health insurer by revenue. The announcement of the merger comes after some favorable developments for the hospital industry. Most importantly, the Supreme Court recently ruled that public health insurance exchange plans could keep the financial subsidies that make these plans more affordable. In part because of the ACA-related expansion of health insurance coverage, hospitals have recently had more patients. M&A activity among acute care hospitals has given them more negotiating clout. Hospitals have been expanding their presence in key geographies through acquisitions and financial partnerships

Carriers Face Tough Post-ACA Market

Carriers Face Tough Post-ACA Market
Players in the U.S. health insurance industry are expected to suffer from narrowed operating margins for the next few years due to the Affordable Care Act (ACA). The operating environment has become so tough that some health plans, especially smaller ones, may be forced to exit the market. Players are facing high regulatory compliance costs, increased taxes and fees, pricing pressure, rising medical costs, stiff competition and general marketplace uncertainty, according to an analysis by Zachs Equity Research. But the ACA is hardly the unmitigated disaster that some industry players make it out to be.

Before the ACA, insurance companies had an upper hand in choosing whom to provide coverage. But now, consumers’ increased purchasing power and access to information is one of the major threats to insurers. Before the ACA, big insurers that dominated large markets rarely gave consumers even basic information, such as the performance of health insurance policies, procedures to claim, the size of the provider network, and cancellation processes. Now customers demand transparency, value, and convenience, leaving insurers grappling for ways to satisfy these needs. The new mission will not be easy to execute.

The industry has witnessed a shift in insurers’ business mix from commercial insurance to government (Medicare, Medicaid and State-subsidized marketplace or exchange) and from fully insured risk policies to administrative services only (ASO) products. This shift in business has hurt profitability. Premiums for Medicare, Medicaid and state-subsidized policies tend to be higher due to the serious health issues for many enrollees, but they carry smaller profit margins compared to commercial insurance. ASO policies only pay administrative charges to the insurers and are far less profitable than full risk covered policies. A massive shift to ASO products is visible since they offer employers the best way to cut health insurance costs. Aggregate industry margins will decline modestly as more industry revenue comes from lower margin government and ASO business.

ACA fees and taxes remain a big issue for the insurers in 2015 and are expected to eat into insurers’ bottom lines, such as an annual health insurance industry fee and an exchange user fee, or Cadillac fee. UnitedHealth Inc. expects its share of the managed care industry’s non-deductible ACA insurer tax to reach $1.8 billion in 2015 from $1.3 billion in 2014. This is on top of $320 million in reinsurance fees. The company expects these two headwinds to cost $0.15 per share in 2015. In 2014, UnitedHealth’s margins fell 50 basis points due to Medicare Advantage cuts, ACA costs, mix (more government business), and less favorable development of medical costs. These trends are likely to remain throughout 2015. While theses factors might affect the players in the industry deeply, Zach does not recommend selling any stock under its coverage, namely UnitedHealth, Anthem, Aetna, Humana, and Health Net.

Last Updated 10/28/2020

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