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New cost pressures cloud the financial outlook
Industry observers have long characterized the Affordable Care Act (ACA) as a reform strategy targeted at health insurance rather than the broader system. Regulations essentially place limits on plans’ ability to protect their reserves and build their profitability. Minimum medical loss ratio (MLR) requirements and new premium taxes and fees are clouding the financial outlook.
Requiring minimum MLRs has been the biggest reason for plans’ narrowing profit margins. By placing a floor of 80% (small-group and individual products) and 85% (large group products) for MLRs, federal regulators have limited investment prospects.
America’s Health Insurance Plans (AHIP) has long held that MLR rules have unintended consequences, such as penalizing insurers for investing in worthwhile programs. On top of that, the reporting structure itself causes additional administrative burdens, according to AHIP.
NashDavid Nash, MD, Dean of Jefferson School of Population Health, says the politics of health reform for plans are formidable.
“The industry as a whole gave up billions in the MLR and the tax conversation in order to cooperate with the White House and help get reform passed,” he says. “They were at the table, via AHIP and other organizations, to be active participants in what we all hope will be the fix.”
Dr. Nash believes the insurance industry will continue to be cooperative in reform and will create products that make sense in the changing market, even though many ACA provisions are operationally challenging.
“Reform would not have been possible without the collaboration of the insurance industry,” he says. “It would have been dead on arrival.”
And the penalties are steep: Failing to meet the 80%/85% mark forces a plan to issue cash-back rebates to employers and individuals.
“There were some plans in certain markets that were already above the MLR floor, so the pressure on them may be less,” says Todd Van Tol, partner with Oliver Wyman, a global consulting firm. “It is fair to say these ACA driven changes are causing payers closer attention to their administrative cost profile.”
He says smaller plans are looking at outsourcing back-office tasks, such as IT. But in the longer term, he predicts more payer consolidation to achieve scale and operational efficiency.
Collectively, health plans issued $1 billion in MLR rebates in August 2012 and $500 million in August 2013. Debra Donahue, vice president of market analytics for Mark Farrah Associates, sees the downward trend continuing in MLR rebates issued in August 2014 for the 2013 plan year.
“The 2015 payouts should be really interesting because that’s when reform kicks in,” Donahue says. “That’s when individual rebates are going to have to be paid and when small group rebates are going to come into play. I think that’s where it’s actually going to be a big deal.”
She says the premiums for the 2014 plan year involved a lot of guesswork, so the forecast on those rebates is a big unknown.
“The plans don’t have any claims history experience on the 30 million people who could potentially enter the system,” she says. “They don’t know what that risk profile is going to look like. They don’t know the impact of high coinsurance and high deductibles.”
At the very least, plans in the exchanges have the protection of risk adjustment, reinsurance and risk corridors in 2014. Donahue says her biggest question is how the allocation of reserved funds is going to play out for plans that underestimate premiums. The underestimators will receive funds from the collective pool, at the expense of the plans that did a better job in pricing.
“It looks like in the Federal Register there is some way the federal government is going to make monthly estimates to let the health plans know month to month what the number is supposed to look like,” she says. “How they’re going to be able to do that is a huge question in my mind. How can they possible get a sense of what that number is going to be when it takes 60 to 90 days to get claims through a system?”
Plans took a seat at the table with federal regulators when health reform was designed. The promise of new enrollment in an otherwise stagnant or down-trending market might have seemed like a good position at the time, but today’s enrollment outlook remains uncertain.
“They won’t get the enrollment they were originally predicting-that 30 million,” Donahue says. “I’m thinking it’s going to be about one-third of that.”
Much of the enrollment gap can be attributed to: technical issues with exchange websites; lack of consumer awareness; and hobbled navigator programs that were supposed to be instrumental in spreading the word and signing up new members.
But Donahue says few of the for-profit insurers are participating in the exchanges to the extent that low enrollment is going to hurt their bottom lines significantly. Aetna, Cigna and UnitedHealthcare, for example, aren’t investing heavily in exchange products. She says they’ve taken a more cautionary stance.
“Humana is one of the ones that is banking on exchanges, and they could have problems there,” she says. “They already cut their outlook in terms of enrollment.”
In early November, Humana plan officials announced they had cut their previous estimate of 500,000 new enrollments by March 31 to 250,000 because of the initial problems with the healthcare.gov website. However, the exchanges are just one market segment. Humana has done well in its Medicare Advantage business.
In the first half of 2013, major insurers gained enrollment in Medicare Advantage, managed Medicaid and commercial segments, both fully insured and administrative services only (ASO).
Historically plans were more profitable if they were better able to manage the cost of care, but the MLR rebates take away plans’ ability to benefit from their cost saving efforts. Donahue says plans are hovering around 5% margins. Some plans were much more profitable than others in the past, but today, the gap is narrowing.
“Managed care has always had narrow margins; that’s not new,” she says. “But they have always had the ability to change that in terms of better management of care and in terms of reaping the benefits of preventive care.”
As long as the averages remain steady, Donahue says she isn’t too concerned. Roughly two percentage points separate the most and least profitable major insurance brands.
The larger plans have an advantage because they can spread operational costs over a larger population, but smaller plans and new entrants to the market will struggle with MLRs. More diversified organizations, such as UnitedHealthcare with its Optum unit, will fare better than pure managed care firms.
Additionally, in the past, plans could adjust premiums to recover from higher-than-expected claims costs. Although the premiums fluctuated for consumers and caused public backlash, plans were able to recoup lost reserves.
Under ACA, state and sometimes federal regulators are examining any premium increases above 10%, often expecting plans to justify and recast their increases. So premium adjustments are essentially capped, and thus, plans could be absorbing added costs with no offsets.
“Regulators are really holding the line in terms of 10% increases, and while that benefits the consumer and the industry overall, it ties the hands of managed care,” Donahue says.
She believes health plans will adjust and most will leverage the positive shifts in care delivery on the ground to their advantage.
Van Tol says while traditional programs such as utilization management and prior authorization are classified as administrative costs under MLR rules, at the same time, plans have an incentive to invest in pay-for-performance, provider relationships, medical homes and other programs that can be classified as medical costs.
Beginning this year ACA imposes new fees/taxes in the fully insured segment, totaling $8 billion in 2014, increasing to $14.3 billion in 2018, with increases based on premium trend thereafter. The Joint Committee on Taxation estimates that the health insurance tax could exceed $100 billion over the next decade.
Total fees will be divided up among insurers based on net premiums, minus some exclusions. Among not-for-profit insurers, including co-ops, only 50% of net premiums are counted, and plans that predominantly serve poor, elderly and disabled populations are exempt.
Managed care Medicaid for fully insured plans will also have to pay, driving up costs for state Medicaid budgets. A Milliman analysis for Medicaid Health Plans of America estimates impact on state and federal program funding between $36.5 billion and $41.9 billion over 10 years.
What’s troubling is that the fees will be passed along to insurance-policy purchasers, including employers, families and individuals in the form of premium increases. Those increases will raise the bar on costs and thus cause higher taxes in later years.
An analysis by Oliver Wyman estimates the taxes/fees will add 1.9% to 2.3% to premium costs for consumers in 2014. Impact generally increases over time to add as much as 3.7% by 2023, according to the firm.
“There will be a pass through effect in terms of a raising of premiums,” says Van Tol, from Oliver Wyman. “As to the tax on the tax, that becomes a strongly diminishing effect.”
He says plans will be managing on tighter margins.
AHIP has encouraged a bipartisan bill that would delay the premium tax by two years. Based on the way the ACA provisions have been jockeyed around in recent months, the delay in insurer taxes is a distinct possibility. Dr. Nash says he wouldn’t be surprised to see a delay.
“The White House needs to rethink the tax to keep the insurance industry at the table and on track toward absorbing 40 million new customers,” he says.