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. 

Advocates Say Consumers Should Be Notified of Medicare Eligibility

More than 40 consumer groups and health insurers sent a letter urging the Centers for Medicare & Medicaid Services (CMS) to develop a system to notify people in Marketplace plans about nearing Medicare eligibility. Joe Baker, president of the Medicare Rights Center said, “Adequate notice for older adults and people with disabilities in the Marketplace who are approaching eligibility for Medicare is altogether lacking. These notice gaps put Marketplace enrollees at risk for higher health care costs, gaps in health coverage, disrupted access to needed care, and tax penalties.”

The letter, signed by the Medicare Rights Center, AARP, America’s Health Insurance Plans, Blue Cross Blue Shield Assn., and other leading voices, urges CMS to screen, notify, and educate people about how and when to transition from their Marketplace coverage to Medicare. The letter emphasizes the need for advance notice on Medicare enrollment rules and the potential consequences of delayed enrollment. The letter was sent in response to CMS’ request for comment on unmet notification needs for Marketplace enrollees nearing Medicare eligibility in the proposed Notice of Benefit and Payment Parameters for 2017. 

California’s Three Largest Health Insurers Among Few to Show Obamacare Profit in 2014

The Los Angeles Times reports that Blue Shield of California led the country with $107 million in profit on Obamacare policies sold to individuals. Kaiser Permanente was second with $66 million, and Anthem Blue Cross ranked seventh nationally with a $9-million surplus in the Covered California exchange.  In the first year of the massive coverage expansion, California’s three largest health insurers bucked the national trend of heavy losses and accounted for half of the gains reported under the Affordable Care Act in 2014.

Blue Shield of California led the country with $107 million in profit on Obamacare policies sold to individuals. Kaiser Permanente was second with $66 million, and Anthem Blue Cross ranked seventh nationally with a $9-million surplus in the Covered California exchange.

Nationwide, insurers reported just $362 million in total profit under a federal rate-stabilization program, while most insurers recorded big losses — a total of $2.87 billion.

Critics have seized on the industry losses as a sign that the health law is failing. Those concerns were amplified when the nation’s largest insurer, UnitedHealth, warned that it may quit selling Obamacare policies because the business was so unprofitable. Now some experts point to California’s experience as a sign that this can be an attractive business for insurers — so much so that it has raised questions about whether state officials should have pushed harder for lower rates.

The data show insurers did not do well nationally, said Larry Levitt, a senior vice president at the nonprofit Kaiser Family Foundation. But in parts of the country where things were working smoothly, like California, insurers were making money.

This new federal data offer the most extensive look yet at how insurance companies fared under the new rules of the Affordable Care Act. The figures are part of a risk corridors program designed as a temporary cushion against high medical claims during the first three years of the national healthcare overhaul.

Under the program, insurers that made money were required to send those funds to the federal government to offset the losses of other companies participating in Obamacare. The arrangement means that California insurers won’t keep these 2014 profits.

Neither will the companies that lost money be made whole right away. The losses were so widespread, and the gains so paltry, that the federal government could only cover 13 cents for every dollar the companies lost. Officials have vowed to use money from this year and 2016 to pay what’s already owed.

Several factors helped California health plans outperform the nation, including strong early enrollment and a politically unpopular decision on policy cancellations. Amid a national uproar, Covered California defied the Obama administration and required participating insurers to cancel existing individual policies at the end of 2013.

That move created a healthier, more diverse mix of old and new policyholders at the start of the exchange. About 35 other states allowed consumers to stay longer on health plans that didn’t comply fully with the new law. That decision left many states with a smaller and sicker population signing up for Obamacare. Many new enrollees had been denied coverage previously because of pre-existing conditions.

“Federal data show that California had the healthiest risk pool of all 50 states,” said Mike Beuoy, a vice president and actuary at Blue Shield. But he and other industry officials say it was hard to predict what would happen heading into the first year of Obamacare coverage.

“We were setting rates for 2014 in the absence of any hard information on what the risk pool would look like,” Beuoy said.

Insurers noted that these excess profits represent a small percentage of the $4.6 billion in premiums paid in the Covered California exchange during 2014. Taxpayers paid about 70% of those premiums through federal subsidies that consumers received based on their income, state data show. “In hindsight, the rates we charged in the individual market were higher than they needed to be,” said Mick Diede, chief actuary at Kaiser Permanente, the state’s largest insurer. For 2015, Kaiser cut its rates 1.4%, on average.

“I think the California experience was a bit of an anomaly,” Diede said. We expect it to even out. Other California insurers may have been helped by the fact that many consumers had difficulty finding a doctor or getting care during 2014. That could have reduced medical claims, boosting the bottom line for companies.

Blue Shield and Anthem Inc., in particular, struggled to deal with the surge of applicants early on and then compounded those enrollment glitches with inaccurate provider directories, regulators found. Officials at Covered California and the insurers say they are examining to what extent those barriers reduced claims.

Michael Johnson, a former Blue Shield official and now a company critic, said the San Francisco insurer should issue more refunds to customers. Blue Shield made this huge profit because they hindered access to care, he said. The company already paid rebates worth $62 million to its individual policyholders for 2014 because it didn’t spend a minimum of 80% of premiums on medical care. A spokesman for Blue Shield said its customer service and provider information have both improved since last year.

A recent report underscores how well California health insurers have held the line on spending premium dollars on medical care despite enormous changes in the market. California was one of only three states nationwide in 2014 where insurers paid out less than 80 cents of every dollar in premiums on medical care, according to Urban Institute researchers. The state went from 81.5% in 2010 to 79.8% last year for the individual market.

Last year’s surplus in California might prompt regulators to take a closer look at the rates that individuals and families are paying for Obamacare. Did Covered California push as hard as it could on rates? It’s a legitimate question to ask, said Katherine Hempstead, who studies health insurance issues at the Robert Wood Johnson Foundation. Unlike most other states, California negotiates premiums with health plans and doesn’t allow every insurer into its exchange.

Peter Lee, Covered California’s executive director, said the state has been effective at achieving stable rates that spare most consumers from double-digit increases annually. The average rate increase in Covered California was 4% for both 2015 and 2016.

A few plans in California made a little bit more than they thought they would in 2014, Lee said. This is evidence the California exchange market can work for patients as well as health plans.

Health Insurers Accelerate Digital Transformation

Health insurers are using new types of information technology to become more consumer-focused, according to a study by Frost & Sullivan. The ACA has brought new regulatory and compliance obligations to the insurance industry and changed IT priorities. IT spending priorities for the health insurance industry will increasingly focus on new tools for data analytics, consumer engagement, and population health and care management. There is a strong focus on improving communication and engagement with members, including mobile and real-time decision support.

The drivers of this trend include greater consumer access to medical information via the Internet and the need for patients to take on increased financial responsibility for their healthcare costs, particularly with the rise of high-deductible health plans.

In addition to the ACA, health insurers are grappling with these key issues:

  • Continued cost inflation driven by hospitals, pharmaceutical companies and technology vendors.
  • Tougher contract negotiations with large employers and provider systems.
  • The rise of individual consumers demanding better service and lower premiums.
  • Growing experimentation with changing reimbursement models and risk-sharing arrangements, which require a more cohesive approach to sharing information with members and providers.

Nancy Fabozzi of Frost & Sullivan said, “The ACA is an overwhelmingly disruptive force for the U.S. healthcare system. Health insurance organizations will continue to respond by aggressively containing administrative costs including IT purchasing. Significant shifts in how spending is allocated across IT market segments will force many vendors to develop new strategies and capabilities, particularly for consumer and analytics IT, which is imperative to remain competitive. Frost & Sullivan predicts that he U.S. Health Insurance IT market will grow at a compound annual growth rate of 5.5% from 2015 to 2020.

UnitedHealth and Anthem Look to Purchase Smaller Carriers


UnitedHealth and Anthem Look to Purchase Smaller Carriers reports that UnitedHealth, Anthem, Aetna, Humana, and Cigna are involved in a buzz of merger and acquisition activity, as the health insurance industry is responding to the aftershocks of the Affordable Care Act.

Fitch Ratings reports that a combination of any of the five largest U.S. health insurers could accelerate further merger and acquisition activity in the managed care sector. Just one mega M&A deal could lead to similar responses by competing firms seeking to shore up competitive disadvantages in scale and product lines. Fitch sees the M&A potential in the health insurance sector as a direct response to anticipated market conditions in a post-Affordable Care Act (ACA) world. Rumors of health insurance M&A activity among the five largest publicly traded health insurers in the U.S. have accelerated in recent weeks.

Fitch says that the ACA, would add to health insurers’ membership volumes, but reduce member margins. This margin pressure would be exacerbated by the government’s challenging fiscal condition, employers’ on-going desire to reduce health care costs, and a heightened need to invest heavily in technology.

As a result, Fitch believes that size and scale are quite important to health insurers’ competitive positions and financial results. In addition, the importance of product line (i.e. individual, group, Medicare, Medicaid) diversification will increase in response to the government’s increasing role in the market, the aging U.S. population and employers’ desires to reduce health care costs

Health Insurers Must Reinvent Their Business Model Toward Consumerism


Health insurers must change their business models now to address a growing wave of consumerism, according to Psilos Group’s 2014 Healthcare Outlook. “The health insurance industry’s 50-year legacy as a business-to-business model is on the edge of irrelevance. The health insurance market is rapidly shifting to 40% individual policies from just 10% prior to the Affordable Care Act. A change of this magnitude affects every stakeholder in healthcare,” said Steve Krupa, managing member of Psilos Group.

Insurers must reinvent their entire businesses to embrace consumer expectations and respond to a dramatic shift toward more individual policies through public and private healthcare exchanges. This means overhauling market research, benefit design, network development, operations, marketing, and sales. Psilos says that insurers need to do the following:
• Understand their new individual consumer base.
• Provide value-added products and services beyond mandated baseline care.
• Shift service to meet consumers’ demands. More consumer interaction will require contemporary technology and automation among insurers and their business process outsourcing partners.
• Understand that price transparency, quality measures, and other healthcare consumerism trends will change the relationship between insurers and providers.
• Make customer service and business transactions real‐time, 24/7, and accessible via multiple platforms, including online and mobile.
• Reach various consumer segments and leverage exchanges as a primary distribution channel, which is in stark contrast to their experience selling group plans directly to employers.

Al Waxman, CEO and senior managing member of Psilos said, “Insurers will have to make major changes…to remain competitive in a post-ACA world. The good news is that technological innovations are addressing the full spectrum of needs…If approached correctly, we’re predicting the result will be a more outcomes-focused healthcare system in which the patient is the most important aspect of the business.” For more information, visit

ACA Hits Health Insurers in the First-Quarter

Many health insurers’ first-quarter 2014 results were hurt by that fact that their income statement now includes the annual industry fee assessed under the Affordable Care Act (ACA), according to Best. The fee begins at $8 billion in 2014 and increases gradually until reaching $14.3 billion in 2018. Beginning in 2014, health insurance issuers pay an annual fee based on net written premiums. The fee is imposed on health insurers depending on the amount of the issuer’s net written premium. The Insurer Fee applies broadly to most forms of health insurance. Many insurers have increased premiums to offset the fee. The American Action Forum  estimates that the fee will result in premium increases for the average insured individual of $60 to $160 per person in 2014 and $260 for the average family. The National Association of Insurance Commissioners requires health insurers to expense the 2014 fee, which will be paid in September, in the first-quarter statutory statements rather than accruing the fee quarterly. For more information, visit .

Health insurers mull ACA plans for 2015

Health insurers must submit details and prices for 2015 Affordable Care Act health plans starting in April and May, but many factors on which those decisions will be based are not yet known, industry officials say. Health insurers do not know what size networks federal officials will approve and the health or usage patterns of new subscribers, nor do they have final enrollment figures for the 2014 plan year. Reuters (3/11)

Enrollment Trends a Key Risk to Health Insurers

The difference between the age distribution assumptions made when insurers set premium rates on their exchange products and the actual age distribution will be a key determinant of the products’ financial results, according to Fitch. The more these pricing assumptions skew younger than actual experience, the greater the potential is for health insurers to experience adverse financial results from exchange-sourced business. It also increases the importance of risk sharing programs built into the ACA. This is especially true for insurers offering individual and small group products on state or Health and Human Services Department (HHS) managed health insurance exchanges.
According to HHS, as off Dec. 28, 2013, 24% of exchange enrollees were 18 to 34 years old. A Kaiser Foundation Family report estimates that number at 40%. Fitch says that healthy 18-34-year-olds who are eligible for exchange enrollment are more likely to delay their enrollment compared to older, less healthy people. The 2014 enrollment period remains open until March 31, 2014.
The HHS report indicates that eight times as many 18 to 34 year olds enrolled in an exchange-sponsored health insurance plan in December than in October and November. For more information,

Health Insurers Extend Deadline for Premium Payment

America’s Health Insurance Plans (AHIP) announced that health plans are extending the deadline for consumers to pay their first month’s premium. Consumers who select their plans by December 23 and pay their premiums by January 10 will be able to have coverage effective January 1.

Consumers who want to begin coverage on January 1 must select a plan by December 23 and pay the first month’s premium by December 31. The short time period to complete these steps, particularly around the holidays, combined with the ongoing technical issues with have raised concerns that some consumers’ coverage may not be able to begin on January 1. Consumers must still pay their first month’s premium before coverage takes effect, but those who pay their premium by January 10 will now be able to have coverage retroactive to January 1.

Last Updated 01/13/2021

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