ACA Year 1 – Who Made Money and Who Didn’t?

By Susan Rupe

There’s one job I would never want to have.

I would never want to be the person in charge of setting premiums for health insurance coverage sold on the Affordable Care Act exchanges. What data do you have to help set the rates? How can you know the age and health status of your customers? Set the rates too high and customers will choose your competitor’s product. Set the rates too low and you lose money.

We’ll see enrollment for ACA Year 4 starting in a few short months, and analysts are still slicing and dicing data from ACA Year 1. Most specifically, they are answering the question, how many health insurers made money on the exchanges in the first year of ACA enrollment?

The Commonwealth Fund recently released a report that provides the answer – not many of them.

More specifically, two-thirds of health insurers lost money in 2014, the first year they participated in the ACA marketplaces. However, the report said that the ACA itself was not necessarily to blame for the health insurers who failed to see a profit that year – the majority of health insurers that lost money in the individual marketplace in 2014 didn’t turn a profit the previous year either.

Setting premium rates for marketplace policies was a particular challenge in that first year of the ACA, the study’s authors said. Insurers had to make assumptions on how much they would spend on claims while figuring how much to charge in premium to give consumers coverage while covering their medical expenses and the insurers’ overhead costs.

The Commonwealth Fund found that medical costs were only 2 percent higher than insurers expected in the individual market. What kept insurers’ estimated and actual medical costs in line was the ACA’s reinsurance provision. The reinsurance program is paid for through an earmarked fee on all health insurance plans and it reimbursed insurers for spending on high-cost enrollees. Those payments helped to make up money lost when insurers’ medical cost estimates were too low.

Health insurers underestimated their total medical costs by an average of 5.7 percent in their first year. About a quarter of the carriers did “substantially worse,” and underestimated their claims by an average of 35 percent. That means only a small percentage of carriers “fared especially poorly,” according to the report.

The report found that the advent of the Affordable Care Act brought an increase in the number of insurers serving individuals and families who were required to buy coverage but were not eligible to obtain it through an employer or other group. In 2012, overall premium revenue from individual plans was $30.3 billion. That nearly doubled to $59.7 billion when the ACA took full effect in 2014.

Factoring in revenue from group health insurance, the report found insurers' overall premium revenues increased by 6.2 percent in 2014, the report found.

But the rise in revenue did not necessarily mean profits for insurers.

Michael McCue, one of the authors of the study, told CNBC that individual market plans are "a small book of business" to insurers who sell group coverage, meaning that even large losses can be covered by profits from the job-based insurance market.

As an example, look at UnitedHealth Group, the nation’s largest health insurance company. UnitedHealth said it would exit most ACA marketplaces next year as a result of taking a $200 million hit from its exchange plans in the second quarter. Despite those losses, however, UnitedHealth, reported that its profits rose 11 percent – to $1.75 billion – in the same quarter. Revenue grew by 28 percent to $46.49 billion.

UnitedHealth’s individual exchange plans are only a small part of its overall business, meaning that its losses in that area can be covered by profits from its much larger group health market.

The study’s authors gave two recommendations on how to keep health insurers profitable in the ACA marketplace. The first – and most obvious – is to get more healthy young adults enrolled and paying premiums, thus improving the risk pool.

The second is extending the ACA’s reinsurance program beyond 2017. Researchers said the reinsurance program “played a crucial role in helping insurers transition” — and the federal government should consider extending the program until the ACA marketplace “has matured.”

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].