Health Insurer Financial Performance Through September 2020
Issue Brief
The pandemic and resulting economic crisis have upended any expectations about what health spending, utilization, and the subsequent financial performance of insurers might have looked like this year. The unprecedented decrease in health care spending and utilization in the spring led to rising margins and profits for many insurers. In the summer and fall of this year, spending and service utilization rebounded as patients returned for routine and elective care, adding to costs associated with testing and treating patients with COVID-19. Job losses and economic instability have driven increased enrollment in Medicaid broadly and increases in Medicaid managed care but seemingly modest changes in enrollment in the group and individual markets thus far.
In this brief, we analyze third quarter data from 2018 to 2020 to examine how insurance markets performed financially through the end of September, as the pandemic continued and health care utilization climbed back towards previous levels. We use financial data reported by insurance companies to the National Association of Insurance Commissioners (NAIC) and compiled by Mark Farrah Associates to look at average medical loss ratios and gross margins in the Medicare Advantage, Medicaid managed care, individual (non-group), and fully-insured group (employer) health insurance markets through the third quarter of each year. Third quarter data is year-to-date from January 1 – September 30. A more detailed description of each market is included in the Appendix.
By the end of September, average margins across these four markets remained relatively high (and loss ratios relatively low or flat) compared to the same point in recent years. These findings suggest that many insurers have remained profitable even as both COVID-related and non-COVID care increased in the third quarter of 2020. The results for the individual and group markets continue to indicate that commercial insurers are going to owe substantial rebates to consumers again next year under the Affordable Care Act’s (ACA) Medical Loss Ratio provision. For Medicaid, application of risk sharing arrangements that many states have in place may ultimately reduce overall margins calculated in the quarterly data.
Gross Margins
One way to assess insurer financial performance is to examine average gross margins per member per month, or the average amount by which premium income exceeds claims costs per enrollee in a given month. Gross margins are an indicator of financial performance, but positive margins do not necessarily translate into profitability since they do not account for administrative expenses. However, a sharp increase in margins from one year to the next, without a commensurate increase in administrative costs, would indicate that these health insurance markets have become more profitable during the pandemic.
Insurers are still required to cover the full cost of coronavirus testing and many have continued to voluntarily waive out-of-pocket costs for coronavirus treatment. Still, insurers have seen their claims costs fall and margins increase relative to 2019.
At the end of the third quarter of 2020, average gross margins among individual market and fully-insured group market plans were 21% and 24% higher, respectively, than at the same point last year. Gross margins among Medicare Advantage plans were 35% higher through the third quarter compared to 2019. (Gross margins per member per month for Medicare Advantage plans tend to be higher than for other health insurance markets mainly because Medicare covers an older, sicker population with higher average costs).
Average gross margins for managed care organizations (MCOs) in the Medicaid market were more than twice as high through the third quarter of 2020 as they were through the third quarter of 2019 (a 109% increase). However, compared to the other markets, margins in the Medicaid MCO market are lower because while rates must be actuarially sound, payment rates in Medicaid tend to be lower than other markets. States typically use a variety of mechanisms to adjust plan risk, incentivize performance and ensure payments are not too high or too low, including various options to modify their capitation rates or use risk sharing mechanisms. CMS has provided guidance about options to adjust payments for MCOs during the pandemic, since states and plans could not have reasonably predicted the changes in utilization and spending that have occurred. Many of these adjustments that states can make may occur retrospectively and may not be reflected in the quarterly data.
Medical Loss Ratios
Another way to assess insurer financial performance is to look at medical loss ratios, or the percent of premium income that insurers pay out in the form of medical claims. Generally, lower medical loss ratios mean that insurers have more income remaining after paying medical costs to use for administrative costs or keep as profits. Each health insurance market has different administrative needs and costs, so low loss ratios in one market do not necessarily mean that market is more profitable than another market. However, in a given market, if administrative costs hold mostly constant from one year to the next, a drop in medical loss ratios would imply that plans are becoming more profitable.
Medical loss ratios are used in state and federal insurance regulation in a variety of ways. In the commercial insurance (individual and group) markets, insurers must issue rebates to individuals and businesses if their loss ratios fail to reach minimum standards set by the ACA. Medicare Advantage insurers are required to report loss ratios at the contract level; they are also required to issue rebates to the federal government if their MLRs fall short of required levels and are subject to additional penalties if they fail to meet loss ratio requirements for multiple consecutive years in a row. For Medicaid MCOs, CMS requires states to develop capitation rates for Medicaid to achieve an MLR of at least 85%. There is no federal requirement for Medicaid plans to pay remittances if they fail to meet their MLR threshold, but a majority of states that contract with MCOs do require remittances always or in some cases.
The medical loss ratios shown in this issue brief differ from the definition of MLR in the ACA and CMS Medicaid managed care final rule, which makes some adjustments for quality improvement and taxes, and do not account for reinsurance, risk corridors, or risk adjustment payments. The chart below shows simple medical loss ratios, or the share of premium income that insurers pay out in claims, without any modifications (Figure 2). Average loss ratios in the Medicare Advantage market decreased four percentage points through the first nine months of 2020 relative to the same period in 2019, and average loss ratios in the Medicaid managed care market decreased by an average of seven percentage points, but still on average met the 85% minimum even without accounting for potential adjustments. Group market loss ratios decreased by an average of three percentage points compared to the same point last year.
Average individual market loss ratios also decreased four percentage points in 2020 compared to the third quarter of last year. Loss ratios in the individual market were already quite low and insurers in the market recently issued record-large rebates to consumers based on their experience in 2017, 2018, and 2019.
Discussion
Just as we found in our mid-year analysis, it still appears that health insurers in most markets have become more profitable during the pandemic, though we can’t measure profits directly without administrative cost data. Across all four markets we examined, average gross margins are higher and medical loss ratios are lower than they were at this point last year.
The return of elective and routine care this fall, coupled with the continued costs of testing and treating patients with COVID-19, contributed to slightly higher loss ratios in the Medicare Advantage and group markets in the third quarter compared to the second quarter this year, but increases in claims costs from June through September did not offset the sharp drop earlier in the year. Average medical loss ratios among individual market plans remained more stable this past quarter and are still well below the 80% threshold established by the ACA. Loss ratios in the Medicaid MCO market are lower this year; however, margins in the Medicaid MCO market are low relative to the other markets, and data do not reflect implementation of existing or newly imposed risk sharing mechanisms.
It remains to be seen whether spending and use will change substantially in late 2020. Insurers may see their claims costs fall again this winter as the pandemic worsens and more enrollees delay care due to social distancing restrictions or general fear of contracting the virus. Record numbers of COVID-19 tests and hospitalizations will likely increase claims costs for some insurers though. Insurers are still generally required to cover the entire cost of COVID-19 testing, and many have extended their waivers on cost-sharing for COVID-19 treatment through the end of the year. (The impact of COVID-19 hospitalizations on Medicaid MCO finances will vary by state, since states have multiple options to address the cost of COVID-19 treatment for beneficiaries).
Medicare Advantage insurers that fall short of required loss ratio requirements for multiple years face additional penalties, including the possibility of being terminated. Some Medicare Advantage insurers may take this opportunity to start offering more benefits than they currently do, which are popular and attract enrollees. For Medicaid MCOs, given all the options that states have to modify payments and risk agreements during the pandemic, it is unlikely that these plans will be left with unexpected surpluses or fail to reach their state’s MLR threshold this year.
ACA medical loss ratio rebates in 2021 likely will be exceptionally large across commercial markets. Rebates to consumers are calculated using a three-year average of medical loss ratios, meaning that 2021 rebates will be based on insurer performance in 2018, 2019, and 2020. Individual market insurers were quite profitable in 2018 and 2019, so even if insurers have very high claims costs in the last three months of 2020, these insurers will likely owe large rebates to consumers. Group market insurers may also owe larger rebates to employers and employees than plans have in typical years, as loss ratios are still lower than previous year.
Methods
We analyzed insurer-reported financial data from Health Coverage Portal TM, a market database maintained by Mark Farrah Associates, which includes information from the National Association of Insurance Commissioners (NAIC). We used the “Exhibit of Premiums, Enrollment, and Utilization” report for this analysis. The dataset analyzed in this report does not include NAIC plans licensed as life insurance or California HMOs regulated by California’s Department of Managed Health Care. Additionally, for Medicaid, there are four states (Arizona, California, New York, and Oregon) that have different reporting practices and therefore consistently only have partial NAIC data available.
We excluded plans that filed negative enrollment, premiums, or claims, or reported more than 1,000 hospital inpatient days per 1,000 enrollees. We only included plans that were categorized as having a “medical” focus in our analysis and exclude “specialty” plans which are categorized as “ancillary or supplemental benefit plans.” We corrected for plans that did not file “member months” in the annual statement but did file current year membership by imputing these values.
The group market in this analysis only includes fully insured plans.1 Premiums to Medicare Advantage plans do not include payments for Medicare Part D benefits. NAIC defines “Medicaid” as “business where the reporting entity charges a premium and agrees to cover the full medical costs of Medicaid subscribers.” This explicitly excludes Administrative Service Only (ASO) plans. We only use “medical” focused plans to help exclude any specialty plans; however, prepaid ambulatory health plans (PAHPs), prepaid inpatient health plans (PIHPs), or Programs of All-Inclusive Care for the Elderly (PACE) plans may be included in the analysis due to NAIC’s definition of Medicaid. We compared the NAIC plans from the second quarter of 2018 to the plans in the Center for Medicare and Medicaid Services’ Medicaid Managed Care Enrollment Report and removed three plans from our analysis that did not offer comprehensive Medicaid acute services. However, CMS enrollment data is not available for 2019 or 2020, so we were not able to compare for the other years.
Gross margins were calculated by subtracting the sum of total incurred claims from the sum of unadjusted health premiums earned and dividing by the total number of members in each market. Therefore, calculations represent trends in each market, not for individual plans. Premiums for Medicare Advantage plans primarily consist of federal payments made to plans for Medicare-covered benefits and include any additional amounts plans may choose to charge their enrollees. Premiums for the individual market were not adjusted to account for rebates required to be remitted to enrollees. Premiums for Medicaid do not reflect contractual adjustments related to risk corridors or other risk-sharing adjustments.
To calculate medical loss ratios, we divided the market-wide sum of total incurred claims by the sum of all unadjusted health premiums earned. Medical loss ratios in this analysis are simple loss ratios and do not adjust for quality improvement expenses, taxes, or risk program payments. For example, the 2016 CMS managed care final rule (CMS-2390-F) allows managed care plans to adjust their medical loss ratio calculations to account for quality improvement expenditures and the removal of estimated Medicaid taxes, licensing, and regulatory fee from the revenues when submitting data to CMS. It should be noted that other organizations and agencies use claims and premiums reported in the “Statement of Revenues & Expenses” for their medical loss ratio calculations.
Appendix
Individual Market. The individual market, which accounted for more than 13 million people in 2019, includes coverage purchased by individuals and families through the Affordable Care Act’s exchanges (Marketplaces) as well as coverage purchased directly off-exchange, which includes both plans complying with the ACA’s rules and non-compliant coverage. (e.g., grandfathered policies purchased before the ACA went into effect and some short-term plans). The federal government provides subsidies for low-income people in the Marketplace and includes measures, such as risk adjustment, to help limit the financial liability of insurers. Insurers in the individual market receive premium payments from enrollees, plus any federal subsidies for people in the Marketplaces.
Group Market. The fully-insured group market serves employers and their employees that are enrolled in fully-insured health plans. This market includes both small and large group plans, but excludes employer-sponsored insurance plans that are completely or partially self-funded, which account for 61% of all workers with employer-sponsored insurance. Roughly 30 million people were enrolled in fully-insured group market plans in 2019. Plans typically receive premium payments from both employers and their employees. While both average claims and average premiums for enrollees in the group market have increased, the market has been relatively stable for insurers over the past decade.
Medicaid Managed Care. The Medicaid Managed Care market includes managed care organizations (MCOs) that contract with state Medicaid programs to deliver Medicaid services to enrollees. More than two-thirds (around 54 million people) of all Medicaid beneficiaries nationally receive most or all of their care from risk-based MCOs. There is significant variation across states with regards to services that are covered by MCOs.
KFF defines comprehensive MCOs as those that provide comprehensive Medicaid acute care services and, in some cases, long-term services and supports as well. This excludes prepaid ambulatory health plans (PAHPs), prepaid inpatient health plans (PIHPs), and Programs of All-Inclusive Care for the Elderly (PACE). However, NAIC defines “Medicaid” as “business where the reporting entity charges a premium and agrees to cover the full medical costs of Medicaid subscribers” and only explicitly excludes Administrative Service Only (ASO) plans from their reporting. While we only use “medical” focus plans to help exclude any specialty plans, PAHPs, PIHPs and PACE plans may not be excluded due to NAIC’s definition of Medicaid. Additionally, for Medicaid, there are four states (Arizona, California, New York, and Oregon) that have different reporting practices and therefore consistently only have partial NAIC data available.
Mark Farrah Associates Health Coverage Portal TM includes data from fully capitated risk-based MCOs as well as non-comprehensive Primary Care Case Management (PCCM) plans and some specialty plans. PCCM plans have lower capitated payments than comprehensive MCO agreements because a primary care physician is paid a smaller flat fee for case management and care coordination responsibilities, but the remainder of services an enrollee receives are delivered on a Fee-For-Service agreement.
Medicare Advantage. The Medicare Advantage market provides Medicare-covered benefits through private plans to more than 24 million Medicare beneficiaries in 2020, with enrollment projected to increase to nearly half of all Medicare beneficiaries by the end of the decade. The federal government makes risk-adjusted payments (higher payments for sicker enrollees and lower payments for healthier enrollees) to plans (averaging $11,545 per enrollee in 2019) to cover the cost of benefits covered under Medicare Parts A and B, with additional payments for costs associated for prescription drug coverage. Some plans charge enrollees an additional premium. The majority of Medicare Advantage plans offer supplemental benefits, such as dental, vision and hearing.