2015 for Health Insurers: What’s Ahead?

By Paul H. Keckley, Ph.D.

2014 was a good year for health insurers. Profits were up. Enrollment was up 16 million thanks to the healthcare marketplaces and Medicaid expansion in states that outsource to private MCOs to run their programs. Medicare Advantage plans remained popular among seniors and profitable for sponsors, and the number of plan options on health exchanges increased 25% from their first year.

As we enter 2015, prospects for continued enrollment gains and solid financial performance are good. There were no major glitches in healthcare.gov in November, red states such as Tennessee announced plans to expand their Medicaid programs using vouchers enrollees can use to buy private coverage and employers that provide coverage say they’ll continue.

But not so fast! While prospects are good, there are issues in 2015 that could dramatically disrupt the industry’s recent smooth ride.

1-The question of subsidies

On March 4, the Supreme Court will hear King vs. Burwell which will determine whether more than five million people who enrolled for insurance through the federal marketplace, Healthcare.gov, are eligible for subsidies (tax credits) to pay their premiums. If in June the court rules they are impermissible, all bets are off. States may pick up the slack for their impacted citizens, but in all likelihood, millions will drop out and take on bad debt for unpaid premiums, hospital and doctor bills will spike and chaos will result. For large insurers, the impact will be irritating; for smaller plans, it could be devastating.

2-The taxes on health insurers

As the 114th Congress convened last week, the elimination of the excise tax on medical device sales (2.3 percent starting in 2013) is rumored to be a done deal. There’s bipartisan support in both chambers of Congress, and the Chamber of Commerce weighed in on its potentially adverse impact on job creation. But less certain is whether Congress will reduce scheduled cuts to the popular Medicare Advantage program or other taxes imposed on insurers. The fact is the profitability of the health insurance sector coupled with its enrollment growth is a hard sell to members of Congress. The health insurance industry has navigated D.C. masterfully since the passage of the ACA in 2010. No doubt, the industry will make its case for lower taxes and concessions, and regulators will politely say “not now.”

3-The states’ impatience with Medicaid MCOs

In 35 states, private MCOs manage the states’ Medicaid populations. In each of these, state officials concluded that the core competencies required to manage the complicated Medicaid population’s health within a predictable, controllable global budget is best outsourced to private MCOs. But private MCOs have not been as forthcoming with requested data about their performance, as desired by states. So many state Medicaid directors are frustrated with their private MCO contractors’ relationships. In many states, relationships between private MCOs and regulators will be tense this year.

4-The question of risk sharing with providers

Accountable Care Organizations, bundled payments, value-based purchasing, patient-centered medical homes and other conventions advanced in the Affordable Care Act put providers on notice that Medicare intends to replace fee-for-service with results-based compensation. Private insurers and employers saw the bet and raised the stakes, advancing their own versions of the same. But lurking beneath the emerging industry around “provider-sponsored risk” are major questions that divide the provider and payer worlds: Can plans be trusted as a partner? Who owns the data? How should risk be shared equitably? How can payers cohabit with providers in risk sharing while the same plans purchase medical groups and narrow their networks, among others? In 2015, risk sharing between providers and plans will accelerate. In some markets, health systems will opt to sponsor their own plan to compete with private insurers. In others, partnerships will evolve.

5-The cost of drugs

Gilead’s Solvaldi works well to treat Hepatitis C patients. It costs $84,000 for a 12-week course of treatment. At the same time, costs for generics have soared in the past 24 months with no sign of slowing down. For health plans, drugs costs are the biggest unknown. Will the FDA approve a drug, and when? How will manufacturers price the product, and for how long will they own their exclusive path to profitability? In the first nine months of 2014, Gilead booked $8.5 billion in new revenues from Solvaldi. Over what period of time and enrollment base can a health plan recoup these costs reasonably? In 2015, the war pitting insurance vs. specialty and generic drug manufacturers will escalate due to drug costs. For some plans, it’s a matter of survival.

6-The value equation for employers

Health insurers have traditionally operated a B2B model for the lion’s share of their business. Government customers-Medicare and Medicaid-and individuals were important but secondary due to their higher risk and lower margins. Fully insured employers provided a significant portion of operating profits to plans and ASO arrangements allowed plans access to valuable data. It’s changing. Employers are acting independently. They’re carving out their own deals and using benefits experts to challenge every nickel they spend on healthcare, including the premiums and charges they pay to insurers. Employers regard their relationships with insurers as necessary but increasingly question their value. The activism of employers is a looming threat to private insurers as they demand more value from these relationships.

7-The public’s trust

Profits in the private health insurance industry are at record highs, especially for the investor-owned plans and the biggest regional players. Executive compensation is headline grabbing. But the public’s trust in the industry remains low, per Gallup and Harris polling. Health plan executives iterate their cost controls and provider risk sharing efforts to investors. They explain their retail health, medical group acquisitions, government contracting and data analytics capabilities as foundations for their future. But the elephant in the room is public trust. Insurers must face the issue of public trust if they are to be successful in the new normal.

2015 has all the makings of a good year for the private insurers, but there are ominous unknowns and possibilities that could reverse its course abruptly.

Paul H. Keckley, Ph.D., is the Managing Director of the Navigant Center for Healthcare Research and Policy Analysis, Washington D.C.