Affordable Care Act Affect On Insurance Companies

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Affordable Care Act Affect On Insurance Companies

Affordable Care Act Affect On Insurance Companies

July 26, 2016 – The summary of this release has been slightly revised to clarify that the Mercatus Center’s report excluded reinsurance, risk adjustment, and risk corridor payments from the calculation of medical loss amounts only. Yes, but payments under these programs are treated separately.

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Since 2014, the Affordable Care Act has reshaped the individual health insurance market by changing the way insurance is sold and subsidizing coverage for millions of new buyers. Insurance companies, with no previous experience in these market conditions, actively competed, but faced uncertainty in pricing their products. This issue’s summary uses newly available data to understand how health insurers fared financially in the first year of the ACA’s comprehensive reforms. Overall, the financial performance of health insurers began to show some pressure in 2014, but the ACA’s reinsurance program significantly reduced the negative impact for most insurers. Although a quarter of insurers fared significantly worse than the others, experience with the new market rules could improve the accuracy of pricing decisions in the coming years.

The Affordable Care Act (ACA) created a dramatically different market for individual health insurance through three key reforms: It prohibited insurers from taking into account subscribers’ health status or risk; providing substantial subsidies for millions of people to purchase individual coverage, many for the first time in their lives; and creating a “stock market” structure that facilitates comparison shopping. In addition, the ACA limits the percentage of premiums that insurers can allocate to profit and administrative expenses and requires state or federal regulators to review the basis for rate increases.

Until recently, reports on the financial impact of these reforms on insurance companies were mostly positive. Stocks rose sharply ahead of broader market indexes.

Finally, full, unsubsidized prices in the individual insurance market were favorable to subscribers compared to prices for similar comprehensive products in group markets.

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And the nation’s largest insurer, UnitedHealthcare, has announced it will withdraw from most of the ACA’s exchanges, in part because of high losses.

This issue briefly analyzes newly available data sources to better understand the financial performance of health insurance companies under the ACA in 2014, the first year of comprehensive reform. Analyzing overall financial performance is important because individual reports can be misleading: one insurer’s losses may not reflect better insurers. Additionally, negative reports based on retrospective data may ignore the offsetting effects of reinsurance and other hedging mechanisms that the ACA added to protect insurers from excessive losses.

Using rate data from the Centers for Medicare and Medicaid Services (CMS), this study compares actual and projected 2014 medical claims from ACA-compliant health plans. We find that medical claims were only 2 percent higher on average than insurers first predicted, after taking reinsurance payments into account.

Affordable Care Act Affect On Insurance Companies

We also examine CMS medical loss ratio data that reflect the financial performance associated with compliant and noncompliant plans, including payments from the three risk adjustment and prior cost-sharing programs. Based on this data, we can summarize the financial performance of health insurance companies in the individual and group markets. Overall, health insurance companies in the individual market lost about 4 percent of premiums, while group insurance companies made a profit of about 2.5 percent.

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In addition, we estimate changes in profitability for 144 real insurers (ie, those with more than 1,000 members) one year before and after full ACA reform. We find that more than a third of them improved or remained profitable from 2013 to 2014. For the rest, financial performance worsened.

We begin by analyzing the financial performance of insurers in each market against their original projections for 2014. Many insurers sought to set competitive prices in this new subsidized market to take advantage of significant increases in enrollment and premium income. Actually happened, as further documented below. However, setting initial rates in the newly reformed and greatly expanded individual market was a particularly difficult first year because insurers lacked actuarial experience under ACA market conditions. So actuaries had to make different assumptions based on judgment and estimation of a certain amount.

Additionally, after insurers submit their rates, President Obama changed the market by allowing insurers to offer non-compliant policies to existing policyholders instead of requiring them to switch to new ACA policies.

Exhibit 1 compares insurers’ projected medical expenditures per member per month (pmpm) with actual medical claims for individual coverage under the ACA in 2014.

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Across the market, medical claims were 5.7 percent higher than forecast ($429 vs. $406 per minute). Some insurance companies fared significantly worse than others. The quartile of insurers with the highest claims (75th percentile) predicted their claims less than 35 percent of the average, while the quartile with the fewest claims predicted their claims more accurately, within 4 percent of the average. , as the average claim is being underestimated. 6 percent across the market. This indicates that serious adverse experiences were concentrated in a minority of insurance companies. We can expect the accuracy of insurance claims estimates to improve in the coming years, as insurance companies gain more real-world experience with new market dynamics.

In 2014, most low-cost claims by insurers were offset by the federal government with $7.9 billion in reinsurance payments to high-cost patients. The reinsurance program helps insurers pay a larger share of high-cost claims in the individual market by using federal funds collected through fees allocated to all health insurance, including self-pay plans. .

Insurance actuaries knew that the reinsurance program would cover some of their companies’ claims, but they didn’t know exactly how much to expect from the program. Finally, reinsurance credits to insurers (excluding commissions paid by insurers) were approximately 50 percent higher than insurers originally estimated ($43 vs. $29 per minute). Those higher payments occurred in part because enrollees in ACA-compliant plans had higher-than-expected claims costs, and because the federal government made the insurance payment formula more favorable to insurers in mid-2014. was given

Affordable Care Act Affect On Insurance Companies

Adjusted for higher coinsurance payments, insurers’ net health claims for individual coverage under the ACA were only 2.4 percent higher than originally estimated ($386 vs. $377 per minute). Although total claims per member per month were $23 higher than expected, reinsurance credits of $43 — $14 more than expected — accounted for more than half of that. This resulted in net health claims only $9 per member higher than what insurers offered for ACA-compliant coverage in the individual market in 2014. . These insurers average $121 per member per month in low-cost claims.

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In the following years, insurance premiums are expected to decrease, as reinsurance is a transitional program aimed at adapting insurance companies to the new market environment. As insurers develop more appropriate actuarial data on which to base credit rating estimates, they may need to rely less on reinsurance to reduce uncertain estimates.

Medical claims reveal only part of the picture of financial performance of insurance companies. Also important is how the ACA affected their administrative costs and premiums and their resulting profit margins. To demonstrate this, we include data from insurers’ medical loss ratio (MLR) reports. MLR is the percentage of premiums an insurance company pays for medical claims or quality improvement purposes compared to overhead administrative costs and profits. The ACA requires health insurers to maintain an MLR of at least 80 percent in the individual and small group markets and at least 85 percent in the large group market. As part of this regulation, insurers must submit an annual report on their MLRs.

Based on MLR data, Exhibit 2 compares health insurers’ overall financial performance for 2014 and the individual market versus the group market for the two years prior to the ACA’s full market reforms.

This data includes all regulated health insurance, both ACA-compliant and “legacy” noncompliant coverage. Several points should be noted.

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First, the ACA nearly doubled insurers’ premium income in the individual market, increasing by 97 percent, reflecting significant increases in enrollment through statutory subsidies and market reforms. Overall, premium income for health insurance companies rose 6.2 percent, including group enrollments. This indicates that employer-sponsored health insurance did not decline significantly in 2014.

Second, medical claims rose slightly more than premiums, reflected by an overall unadjusted increase in MLR of 1.1 percent. Administrative expenses as a percentage of total premiums (including brokerage commissions) increased only slightly (0.6%). In the individual market, administrative costs declined as a percentage of premiums as a modest increase in administrative costs was offset by a large increase in premiums. This shows that insurance companies were able to effectively expand coverage in 2014.

As medical claims and administrative costs outpaced premiums in 2014, health insurers’ gross operating profits (known as underwriting profits) declined significantly from previous years.

Affordable Care Act Affect On Insurance Companies

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