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Health Insurers Rely on Group Coverage Profits to Offset Exchanges

Analysis  |  By Gregory A. Freeman  
   January 17, 2018

The individual health insurance market is still a slog for health plans, but health plans remain profitable overall because of their group coverage sales. 

Despite all the talk about how the Affordable Care Act and recent revisions to the healthcare law have challenged health plans to remain profitable on the individual market, insurers are reporting good financial results and are prospering.  

That's because their bread-and-butter business, group health insurance provided through employers, is largely unaffected by the turmoil in the individual market.

More than half of Americans have health insurance coverage paid for by their employers, in whole or in part, and another 40% are covered by Medicare or Medicaid, leaving only around 12% to fend for themselves in the individual market, notes Christina Marsh Dalton, PhD, assistant professor of economics at Wake Forest University's School of Medicine in Winston-Salem, North Carolina.  

That means that even health plans struggling to profit in the individual market can succeed overall, Dalton says.

"All the discussion in the news is about the individual market. This is the piece of the industry that wasn't working and was addressed most directly by the Affordable Care Act, and it's the piece that is undergoing so much change right now," Dalton says. "But for the rest of the country who get their insurance through their employers or Medicare or Medicaid, not a lot has changed for them. That's a stable market and that's where insurers can still be successful."

Stock prices for some of the country's health insurance companies outperformed the rest of the stock market in 2017, despite how efforts to repeal and replace the Affordable Care Act created uncertainty for the industry.

A report from the Kaiser Family Foundation, examining  insurers' financial data from the third quarter of 2017, found that insurers gained ground in their medical loss ratios, which averaged 81% through the third quarter.

They saw similar improvement in gross margins per member per month in the individual market segment, up to $79 per enrollee in the third quarter of 2017. That figure had been as low as $10 in 2015.

"These new data from the first nine months of 2017 offer further evidence that the individual market has been stabilizing and insurers are regaining profitability, even as political and policy uncertainty and the repeal of the individual mandate penalty as part of tax reform legislation cloud expectations for 2018 and beyond," the Kaiser report says.

"Third quarter financial data reflects insurer performance in 2017 through September, before the Administration ceased payments for cost-sharing subsidies effective October 12, 2017. The loss of these payments during the fourth quarter of 2017 will diminish insurer profits, but nonetheless, insurers are likely to see better financial results in 2017 than they did in earlier years of the ACA Marketplaces," the Kaiser report says.

Industry remains stable and profitable

Dalton expects the insurance industry to remain stable and profitable by relying on the group market.

No matter how unappealing the individual market becomes to insurers, they have the flexibility to quickly pull out when it becomes clear they won't be able to make a profit, she says.

Any legislation that makes them less flexible in that regard could have a far-reaching impact on the insurance industry overall, she says.

"There is no precedent for forcing companies to offer a product, but of course it wasn't so long ago that we also had never seen the government forcing individuals to buy a product, and the individual mandate still went through," she says.

In the individual market, uncertainty is still the primary motivator for health plan strategies in 2018, Dalton says.

Some plans may respond to the uncertainty with more restraint and conservative approaches, she says. Losing the individual mandate in 2019 has many health plan leaders anticipating a significant reduction in membership and revenue, she says.

"Executive orders are also creating uncertainty because health plans can't see those changes coming from very far off—orders like the one expanding association health plans, and the extension of short-term health plans," Dalton explains. "The Trump executive orders are leaning toward creating more diversity of plans, which, on some level, could increase demand. With more plans created, you may have more people signing up because they can find a plan that matches them."

Critics have said the expansion of association health plans could further damage the individual market by siphoning off generally healthy people, leaving only the sickest and costliest consumers to buy insurance on the individual health exchanges.

Related: Association Health Plans Would Be Another Hit to Struggling Insurers

That could happen, Dalton says, but insurers also will be selling group health plans and could benefit from those as well.

"Those healthy people might not have been interested in buying those ACA-compliant plans because they were so expensive and they didn't think they needed all that coverage, and in 2019 they won't have any mandate forcing them to buy them," she says. "Now those healthy people might have reason to buy a health plan rather than opt out, so there is potential for more purchasing of insurance because insurers can offer plans that healthy people would like more."

Dalton notes that the federal exchanges have seen insurers exiting at a higher rate than the state exchanges, and she suspects that is partly because there is more coordination at the local level.

"If it looks like enrollment is not at the levels the state expected and insurers want to pull out, the state can increase marketing or extend the enrollment period," she says. "Having a locally responsive market seems to help match insurers to buyers more effectively."

Gregory A. Freeman is a contributing writer for HealthLeaders.

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