Health insurers made $41B the year COVID landed. Why are they raising rates now?

Christopher Snowbeck, Star TribuneThe Minneapolis Star Tribune

Claire Lindell had to wait months for treatment when doctors in April 2020 were forced to suddenly cancel the little girl’s spine surgery.

The delay was particularly stressful because the operation addressed several issues, including the 4-year-old’s high risk of respiratory infection — such as from the emerging COVID-19 virus.

“That was a tough period,” recalled her father, A.J. Lindell of Prior Lake.

Five years later, Claire’s health care journey has gone well. And the Lindells, who always kept paying health insurance premiums even when care was unavailable, help illustrate an intriguing financial backstory with the pandemic.

Hospitals and clinics in Minnesota and across the country were frantically preparing five years ago this spring to conserve resources for an expected surge of COVID-19 patients that some feared could overwhelm the health care system.

Yet the first year of the pandemic was historic not only for COVID, but for a surprising side effect — the health system known for inexorable growth actually provided less care in most categories. Elective procedures were put on hold due to emergency orders, and even after they lifted, many patients still opted to stay away.

Health insurers were huge financial beneficiaries of this surprise.

Their profits increased 52% as they continued collecting insurance premiums while fewer patients went to the doctor. Whereas health plans across the country collectively reported an average of $27 billion in operating profit per year between 2017 and 2019, operating earnings across the industry in 2020 surged to $41.4 billion, according to a Minnesota Star Tribune analysis of data provided by Mark Farrah Associates, a Pennsylvania-based analytics firm that tracks data across all U.S. states and territories.

In 2020, customers paid about $1 trillion to health insurers, so the earnings worked out to operating profit of just over 4 cents per dollar of revenue, the analysis shows. That’s even after federal law forced them to return some excess profit via record rebates.

Eden Prairie-based UnitedHealth Group, parent company of health insurance giant UnitedHealthcare, saw its second quarter profit double that year. Three of Minnesota’s four largest nonprofit health insurers — Blue Cross and Blue Shield of Minnesota, HealthPartners and UCare — saw a noticeable improvement in 2020 financial results.

All four of those insurers plus others across the industry announced at the time financial relief packages for customers and cash-strapped health care providers that effectively reduced their rebate requirements under the 2010 Affordable Care Act. UnitedHealth Group alone provided $4 billion in premium credits, cost-sharing waivers, payments to providers and other assistance.

And across the industry, insurers imposed relatively modest premium increases the next two years, according to the Mark Farrah Associates data, which is derived from public filings with state insurance commissioners. (The statistics don’t include coverage provided by employers who self-insure their health plans.)

Fast forward past the end of the pandemic, and the health care finance story has changed dramatically — premiums are rising much faster now, amid a health care cost surge that includes costly new GLP-1 medications for diabetes and weight loss.

Those $41.4 billion profits from the first year of COVID are so far in the rearview mirror they can’t provide much cushion against today’s trends, said Cynthia Cox, a researcher who follows the individual health insurance market for California-based KFF.

“The benefits were already kind of paid out, I guess you could say,” Cox said.

“During the pandemic, basically what insurers were doing was offering cost-sharing waivers and premium waivers. And then following the pandemic, they raised premiums by less than they otherwise would have, for those first couple of years,” she said. “But now health care costs are going up again and rising faster than usual, in part because of inflation.”

For group health plans, premiums across the country increased an average of 7.8% this year before employers made benefit design changes to moderate the jumps, said Brooks Deibele, an executive vice president in the Twin Cities office of Holmes Murphy, a benefits consultant.

The increase was the biggest in more than a decade, Deibele said, and was driven by higher health care prices plus expanded use of costly prescription drugs. Initially with the pandemic, higher profits might have allowed some health insurers to absorb a portion of rate increases for customers the following year or two, he said. But that time is done.

“Any financial tailwinds that the carriers had from the pandemic — we’re well beyond that, at this point," said Deibele, who is employee benefits practice leader at the Iowa-based company.

In 2020, the U.S. health care system saw a big decline in utilization of preventive services like colonoscopy and mammography as well as cuts to certain elective surgeries, said Christine Eibner, director of the health care payment, cost and coverage program at California-based RAND Corp. There was a large increase at the time of doctors providing care via telehealth, Eibner said, but it wasn’t enough to offset the decline in office visits.

“Some clinics and health care providers closed services or limited access to certain procedures, and patients sought to avoid health care settings because they wanted to reduce their exposure to a highly virulent virus,” said Stefan Gildemeister, health care economist with the Minnesota Department of Health.

Statewide, there were about 68,000 fewer outpatient surgeries in Minnesota during 2020 than the previous year, according to state Health Department data. Annual emergency room visits fell by about 300,000 to 1.67 million during the pandemic’s first year.

Inpatient days and outpatient visits dropped along with acute care admissions, which still hadn’t returned to pre-pandemic norms in Minnesota as of 2023.

Claire Lindell of Prior Lake indirectly accounted for a tiny portion of this decline.

After Lindell couldn’t have surgery in April 2020, doctors at Gillette Children’s Specialty Healthcare in St. Paul operated in July and August. Her surgeries were completed during the calendar year, but hospital officials say the earlier patient delays had a domino effect.

Ultimately, some cases were pushed into the following year, lowering pay from commercial health insurers during 2020.

During those opening weeks of the pandemic, there was a 60% decline in ambulatory care across the country.

“It’s really striking,” said Peter Huckfeldt, a health economist at the University of Minnesota.

The end result shows up in the medical loss ratio (MLR), a key metric for health insurers that shows the percentage of premium revenue they spend on patients’ medical expenses.

Across the country, this ratio fell from 87.2% in the pre-pandemic period to 85% in 2020, according to Mark Farrah Associates.

When an insurer’s MLR falls below certain benchmarks — 80% in the individual market, for example, and 85% in the market for large employer groups — the law says health insurers must pay consumer rebates to make up the difference. Rebates hit record numbers in 2020, RAND’s Eibner said, and remained high the following year.

With group coverage, rebates go to the plan’s sponsor, typically the employer, rather than the individual patient. Plan sponsors are expected to pass along some rebate savings to employees, but it may come in the form of lower future premiums, rather than individual rebate checks.

Nevertheless, insurers “can’t really hoard it, because they are subject ... to these minimum loss ratio requirements,” Eibner said. “So they couldn’t just pocket all of that — they had to pass some of it back.”

Over the past three years, MLRs have increased again with higher medical spending. The trend of rising expenses explains why premiums are continuing to grow, said Ezra Golberstein, an associate professor in the division of health policy and management at the U.

“This is a period when we are seeing things like the explosion of the GLP-1 drugs, which are very expensive, and we’re seeing the continued growth of a lot of different biologic drugs that are also very expensive,” Golberstein said. “That’s to say nothing of the continued consolidation of the health care delivery systems, which also drives up prices.”

General inflation has been making its way into health care provider budgets, exerting upward pressure on costs, Eibner noted. She also cited “workforce shortages that may be affecting prices.”

Insurers' average profit margins fell to about 2.4% in 2023, the most recent year data is available, according to Mark Farrah Associates — lower than the pre-pandemic period. The data includes individual market coverage, fully insured groups and Medicaid and Medicare coverage provided through private health plans.

The precise mix of factors pushing up premiums can vary by market, said KFF’s Cox, noting that individual market health insurers don’t typically cover GLP-1 medicines for weight loss. Even so, those premiums across the country are up about 7% this year, the highest growth rate since before the pandemic.

Private health insurance expenditures always tend to rise, but for 2020 they were down 0.4% overall. Spending by the federal government — including big investments for vaccine development and to help health care providers — grew by more than one-third, driving an overall increase in health care expenditures by year-end.

Bloomington-based HealthPartners said its health insurance division saw lower-than-expected claims for about three months in spring 2020 followed by a significant rebound in claims in the third and fourth quarters.

The insurer said 2023 marked its third consecutive year of record-setting claims costs, including $650 million in prescription drug spending — an increase of 15%.

“Specific to GLP-1s, we paid about $12.5 million for that class of drugs in 2022 and $46.1 million in 2023,” the insurer said. “Given the very high cost ... we put limitations and exclusions on this category of medication for 2024 because we know our members can’t afford the premium increases that would be required to cover the drug.”

Cost controls by insurers get controversial when patients feel like coverage denials are blocking needed care. A.J. Lindell said he had to spend months in late 2021 and 2022 going through various appeals to get an insurer to pay for Claire’s in-home care.

It was one of several such episodes the family has endured over the years, he said, but there were no coverage snags in the first 18 months of COVID. During that period, financial assistance from health plans often included waiving certain rules that drive denials.

Claire Lindell was born with a genetic condition whose impacts extend to her heart and lungs.

Surgeries in 2020 addressed multiple curvatures of her spine and have clearly helped her lung function, A.J. Lindell said. The procedures also enabled her to keep her head raised and look around more easily, letting her better connect with peers and family and observe the surrounding world.

The good outcome ameliorated the stress of that initial treatment delay, Lindell said, along with the challenge of repeat hospitalizations during the public health emergency.

“She’s thriving at school,” he said. “She can go out in the world and interact with people and make her mark. It’s something that five years ago — there was no way we could have even pictured this.”