ACA Year 1: The Sickest Patients = The Most Profit

The data from the first year of the Affordable Care Act continue to be sliced and diced by analysts. In the latest batch of data-mining, we will look at a predictive modeler who discovered something interesting among the numbers.

Syed Mehmud is a predictive modeler with Wakely Health Care Actuaries and is an Associate of the Society of Actuaries. In analyzing 2014 ACA data from 20 different insurers and 50 issuers, he discovered that the sickest patients generate the most profit for insurance companies. What? It was commonly believed that sicker patients would cost their insurers more. So why the switch?

Chalk it up to the ACA’s risk adjustment provision, where the U.S Department of Health and Human Services (HHS) offsets costs based on the relative risk of surrounding insurance plans.

Even Mehmud said his finding was “a bit of a surprise” when I interviewed him last week.

“The historical intuition is that in order to become more profitable, insurers select the good risks, avoid the bad risks and avoid high costs,” he said. “But with underwriting going by the wayside under the ACA, there was a lot of speculation leading up to the start of the ACA.”

The finding of unhealthy patients leading to insurer profits was true for about 60 to 70 percent of the issuers in the study, Mehmud said. The exact opposite was true of the remaining issuers: their healthiest clients were their most profitable.

The most profitable health insurers had several things in common, Mehmud said. They had narrow provider networks, good disease management, good ties to the Medicaid market, and did not sell many platinum-tier or gold-tier plans.

“The platinum and gold plans struggle to be profitable,” he said. “When we look at all the tiers of coverage, the average risk score increases when you move from bronze to silver to gold. The sicker patients tended to go with the richer plans; your healthier patients went primarily with bronze plans.”

But looking ahead to 2015 and 2016, things could change because of rising premiums, Mehmud said. In addition, there will be changes in the risk model during the 2016-2019 time period because of changes in the risk adjustment provision.  So whether these unhealthy patients continue to make money for their insurance issuers is anyone’s guess as we gear up for another year of ACA open enrollment.

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 Susan.Rupe@innfeedback.com.

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