Taking stock of insurer financial performance in the individual health insurance market through 2017

A reporter reads a summary of the performance and usage over the first two days of open enrollment of the Massachusetts Health Connector website, the state's health insurance website under the Affordable Care Act or Obamacare
Editor's note:

This analysis is part of the USC-Brookings Schaeffer Initiative for Health Policy, which is a partnership between the Center for Health Policy at Brookings and the University of Southern California Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings.

The Affordable Care Act (ACA) implemented wide-ranging reforms to the individual health insurance market starting in 2014, most importantly by barring insurers from denying coverage or varying premiums based on health status, requiring all plans to cover certain services and provide a basic level of financial protection, providing subsidies to help low- and moderate-income people afford coverage, and requiring all individuals to have coverage or pay a penalty. In “Taking Stock of Insurer Financial Performance in the Individual Health Insurance Market Through 2017,” (PDF) Matthew Fiedler takes a detailed look at insurers’ financial performance in this new institutional environment, as well the economic forces that have shaped that performance.

The report finds that insurers were on track to break even or make modest profits on ACA-compliant individual market policies in 2017, on average, before the Trump Administration’s decision to end cost-sharing reduction payments. The sharp improvement for 2017 were the result of the significant premium increases insurers implemented for 2017, together with continued subdued claims growth in the ACA-compliant individual market. That progress should have set the stage for comparatively moderate premium increases in 2018, likely in the mid-to-high-single digits. The higher premium increases occurring in reality likely reflect a range of threatened and actual changes in federal policy.

In greater detail, the report reaches two main conclusions about the state of the individual market in 2017 and how the market would have evolved in 2018 in the absence of recent changes in policy:

  • Insurers were on track to break even or make modest profits on ACA-compliant policies in 2017, on average, before the administration ended cost-sharing reduction payments: The report estimates that insurers were on track to incur small losses averaging 0.4 percent of premium revenue on ACA-compliant policies in 2017 before the administration ended cost-sharing reduction payments for the final quarter of the year. Furthermore, there is reason to believe that the data used in this analysis may systematically understate insurers’ actual financial performance, suggesting that insurers were, in fact, on track to make modest profits on ACA-compliant policies in 2017, on average nationwide.

Individual market profit margins as a percent of premiums, 2011-2017

  • In a stable policy environment, 2018 premium increases for ACA-compliant policies would have been in the mid-to-high single digits on average nationwide: With premiums at an approximately sustainable level in 2017, premium increases for 2018 would only have needed to accommodate underlying cost trends and the expiration of the one-year moratorium on the ACA’s health insurance fee if federal policy toward the individual market had remained where it was at the start of 2017. Taken together, those factors would likely have generated premium increases in the mid-to-high single digits on average nationwide.

It is clear that individual market premiums will increase by substantially more than this in 2018. These larger increases likely primarily reflect the unsettled federal policy environment. During 2017, Congress undertook a lengthy debate over possible legislative changes to the ACA, which included immediate repeal of the individual mandate. The Trump Administration has also repeatedly threatened to take actions that would weaken the individual market, and it has acted on some of these threats, including by ending cost-sharing reduction payments to insurers.

The report also takes a granular look at how insurer financial performance in the ACA-compliant individual market has evolved since 2014. This portion of the analysis reaches several conclusions:

  • The losses insurers incurred on ACA-compliant policies in 2014 are readily explained by a variety of transitional factors: Insurers incurred losses of 5.7 percent of premium revenue on ACA-compliant policies in 2014. As other authors have noted, these losses are comparatively easy to explain. Insurers had limited information about the likely composition of the individual market risk pool when they set 2014 premiums and may have intentionally underpriced in an effort to gain market share in the early years of the new market.
  • Insurers’ losses on ACA-compliant policies deepened in 2015 and 2016 because of puzzlingly small premium increases, not rapid growth in claims spending: Insurers’ losses on ACA-compliant policies deepened to between 11 and 12 percent of premium revenue in 2015 and 2016. The deterioration in insurers’ performance was not driven by particularly rapid claims growth. Per member per month claims spending in ACA-compliant plans is estimated to have grown 3.2 percent in 2015 and 1.5 percent in 2016, slower than the claims growth observed in employer-sponsored insurance in these years. Slow growth in claims spending likely reflected a stable or improving risk mix in ACA-compliant plans during these two years, insurer plan design changes aimed at reducing costs, and other factors.

Nevertheless, insurers’ losses deepened in 2015 and remained sizeable in 2016 because insurers’ moderate premium increases were insufficient to offset the combination of slow claims growth and, more importantly, the scheduled phasedown of the ACA’s transitional reinsurance program. The reinsurance program defrayed a portion of insurers’ costs for high-cost enrollees from 2014 through 2016, but became less generous over time, removing the equivalent of 8.2 percent of per member per month premium revenue in 2015 and another 6.9 percent in 2016.

It is unclear why insurers failed to implement larger premium increases in 2015 and, particularly, 2016, the first year in which insurers had a full year of claims experience to look at when setting premiums. However, these decisions could reflect factors similar to those that led insurers to underprice in 2014, namely uncertainty about how claims costs would evolve in the years immediately after 2014 and strategic decisions to underprice in order to gain market share.

Decomposition of year-over-year changes in profit margins

  • In contrast to 2015 and 2016, the premium increases insurers implemented for 2017 were more than sufficient to offset slow claims growth and the final step in the phasedown of the reinsurance program, facilitating the sharp improvement in margins seen in 2017: Premiums in the ACA-compliant market are estimated to have risen by 20.5 percent on a per member per month basis in 2017. Offsetting the final step in the phasedown of the transitional reinsurance program only absorbed 5.9 percentage points of this increase, and data to date imply that claims growth would only have absorbed an additional 2.7 percentage points had cost-sharing reduction payments continued. As a result, this year’s premium increases have allowed insurers to sharply improve the financial performance of their ACA-compliant plans.

Decomposition of change in profit margin from 2016 to 2017

  • Continued slow claims growth in 2017 shows that the 2017 premium increases did not meaningfully damage the individual market risk pool, consistent with pre-ACA evidence: Some observers argued that the large premium increases insurers implemented for 2017 would drive many healthy enrollees from the individual market, causing large increases in average claims costs that would keep insurers from returning to profitability. In fact, data to date indicate that per member per month claims spending in the ACA-compliant market was on track to rise just 2.7 percent in 2017 if cost-sharing reduction payments had continued.

This outcome was entirely predictable. More than half of enrollees in ACA-compliant plans receive tax credits that protect them from premium increases, and pre-ACA evidence implied that reductions in enrollment among unsubsidized enrollees would be modest in size and only moderately tilted toward healthier enrollees. In light of these facts, the report estimates that the premium increases implemented for 2017 should only have been expected to increase average claims costs in the ACA-compliant market by 1.6 percent, providing only a slight headwind to insurers’ efforts to return to profitability by raising premiums.