ACA insurers need low claim volumes to survive exchanges
Wednesday, May 03, 2017
The Henry J. Kaiser Family Foundation reports that just 7 percent of the U.S. population get their insurance on the private market — actually a fairly small segment of the population. Yet this group is having a major impact on the future of the Affordable Care Act.
Though the ACA has provided millions of people with health insurance, some insurers have experienced substantial losses and have removed themselves from the exchanges. Of course, the stability of the market and willingness of insurers to continue to participate is essential to the ACA's success, if it has any sort of future in the Donald Trump era.
So far, in 2017 there have been some high-profile exits and premium increases, "raising concerns over the stability of the individual market," Kaiser points out. The Congressional Budget Office expects the ACA individual market to remain stable across most part of the country, but notes that the success of the ACA "is dependent on the participation of private insurers in the marketplaces, who will need to be profitable over the long term to remain in the market."
Medical loss ratios are a basic financial measurement used in the ACA to encourage health plans to provide value to enrollees. When MLRs are higher, insurers are paying out more of their premium income on claims, and it is unlikely insurers can be profitable when MLRs exceed 85 percent to 90 percent.
Thus, if an insurer uses 80 cents out of every premium dollar to pay its customers' medical claims and activities that improve the quality of care, the company has a medical loss ratio of 80 percent.
In 2014, when the exchanges opened and the bulk of the ACA's market reforms took effect, individual market insurer financial performance worsened, with individual market MLRs averaging 98 percent compared to 84 percent a year prior.
"The individual market underwent a number of changes in 2014, and insurers had very little information to work with in setting their premiums. On average, insurers set premiums too low to cover their costs in the individual market," Kaiser noted. "This mispricing is likely because of a combination of fewer young or healthy enrollees than initially anticipated, which was augmented by the late regulatory decision to permit some noncompliant plans to be retained, as well as some competitors apparently underpricing in an attempt to be competitive."
In 2015, as claims growth continued to outpace premiums, individual market MLRs increased again, to an average of 103 percent — otherwise known as a losing proposition for insurers in the market.
However, according to Kaiser, 2016 showed the individual MLRs began to fall as insurers raised premiums faster than the rate of claims cost growth, the first year that insurers had any meaningful data with which to work. Although insurers' individual market performance improved on average in 2016, loss ratios remained relatively high.
On average, MLRs fell by seven percentage points from 2015 to 2016 to 96 percent. Still, despite this lower MLR, these ratios must continue to fall "for the industry as a whole to be profitable in this market."
Perhaps a simpler way to examine the health the marketplace, Kaiser points out, is to examine the average gross margins per member per month, which is the average amount by which premium income exceeds claims costs per enrollee in a given month. These are an indicator of performance, though not necessarily a translation of profitability since they do not account for administrative expenses.
Medical loss ratios are higher now than they were before the ACA, so the total amount of premium income also is more since more people are enrolled in the market than before the exchanges opened.
This market worsened in 2014 — dropping from about $37 to $7 per enrollee — and again in 2015 to a loss of $10 per enrollee. The numbers began to improve in 2016, increasing by about $24 to $14 per enrollee. The takeaway here is that insurers need to see a similar rate of improvement in 2017 to reach pre-exchange profitability margins.
Why does this matter, and what does all of this mean? Kaiser tells us that, on average, insurers participating in ACA marketplaces raised premiums by an average of 22 percent from 2016 to 2017 because they had to. If enrollment stays where it's at — about 12.2 million signed up for 2017 — and if claims volume do not rise, insures may significantly improve their financial performance in this market in 2017.
So, if the ACA has any chance of survival — which is unlikely given Trump's continued efforts to replace the law — the model described by Kaiser is likely its only way forward.
"Insurers still face tremendous uncertainty going forward," Kaiser reports, and "mixed signals from the administration and Congress over the direction and timing of ACA repeal efforts, and a lack of clarity on individual mandate enforcement and payments for cost-sharing subsidies, could make insurers hesitant to continue to participate, even if the market is showing signs of improving otherwise."
These data and statistics may ultimately be moot, but they provide some perspective into the landscape of insurance and the health of the ACA.
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