Companies could be hit with a double peak of claims for COVID-19 patients and care that people put off because of the pandemic.
For health insurers, making actuarial calculations is like driving a car while using only the rearview mirror. This analogy was never truer than it was early last year, when actuaries read about the first reported cases of COVID-19 and feared a looming tsunami of the dreaded IBNR — incurred but not reported — claims.
Since then, actuaries have learned that any planning they did in 2019 likely had little value as COVID-19 infections spread nationwide, employers laid off workers, and governors shut down schools and businesses. Although some costs rose due to increased spending for the care of insured members who contracted the SARS-CoV-2 virus, the shutdown of other healthcare services eased the financial pain for many insurers.
“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,” according to a report in December 2020 from Kaiser Family Foundation researchers.
Many for-profit insurers reported record profits in the second quarter and for the full year of 2020 because their members did not visit the hospital or see their physicians at usual levels. Some of those sky-high profits were tempered in subsequent quarters when pent-up demand for care caused insurers’ costs to rise. The financial ups and downs of a pandemic-afflicted year became apparent early in 2021 when three major health insurers reported on their financial performance for 2020’s fourth quarter and the full calendar year.
On Jan. 20, the nation’s largest insurer, UnitedHealth Group, reported its full-year 2020 profit of $15.4 billion, including $2.2 billion in profits for the fourth quarter,
$3.2 billion in the third quarter and $6.6 billion in the second quarter. The insurer said profits were substantially higher than normal due to the unprecedented delay in elective and nonemergency procedures, the Star Tribune in Minneapolis reported.
On Feb. 3, Humana reported a loss of $458 million in 2020’s fourth quarter, a considerable drop from the $593 million in profit the company reported for the fourth quarter of 2019. The insurer attributed the loss to a big jump in hospital admissions for patients with COVID-19 in nearly all of its markets.
Although spending for non-COVID-19 care fell below normal levels by approximately 15%, Humana said that drop did not offset the rise in costs for testing and treating members with COVID-19. For 2020, however, Humana reported a profit of $4.6 billion, a 40% increase over the company’s 2019 profits of $3.5 billion.
The day after Humana reported its financial results, Cigna reported $4.1 billion in profit for the fourth quarter of 2020, a big jump over the $977 million in 2019’s fourth quarter. For the full year, Cigna earned $8.5 billion in profits, a 66% increase from the company’s profits of $5.1 billion for 2019.
“By all accounts, the publicly traded health insurers did very well last year,” said economist Sara R. Collins, Ph.D., vice president for healthcare coverage and access at The Commonwealth Fund. “By that I mean they were quite profitable.”
Among insurers, the all-important medical-loss ratio (MLR) fell. Most health plan companies had higher costs due to payment for members’ COVID-19 treatments, but they also had lower costs because so many Americans delayed elective and other nonemergency care. “In general, they had lower claims from less utilization, and that was in all coverage segments: the individual market, the group market, Medicare Advantage (MA) and Medicaid managed care,” Collins explains.
The Kaiser Family Foundation’s analysis was similar. Using data from the National Association of Insurance Commissioners compiled by Mark Farrah Associates, researchers found that average profit levels at the end of September in the four main insurance markets — individual, group, MA and Medicaid managed care — were high and that MLR levels were low or flat compared with levels in the third quarter of previous years. “These findings suggest that many insurers have remained profitable even as both COVID-19-related and non-COVID-19 care increased in the third quarter of 2020,” the researchers wrote.
Another view of the health insurance market comes from Fitch Ratings, which analyzes companies’ credit worthiness. While stating that 2020 was a turbulent year for insurers, Fitch reported that these companies had strong operating performance in 2020, and Fitch expects that level of performance to continue in 2021. Fitch report added, however, that this year could see “elevated volatility” among insurers and from one quarter to the next.
Although MLRs declined in the second quarter of 2020 as healthcare utilization fell, Fitch does not expect MLR levels to go down again this year. “Fitch currently has stable outlooks on nearly all of its ratings in the U.S. health insurance sector,” the company stated in its 2021 outlook report.
Insurers helping out
This situation is common among large, publicly traded, for-profit insurers. “You can’t really generalize for the entire health insurance market, because every market is unique,” says Margaret A. Murray, CEO of the Association for Community Affiliated Plans (ACAP) and a member of the Managed Healthcare Executive® editorial advisory board. ACAP represents 78 nonprofit health insurers serving more than 20 million low-income members with complex healthcare needs. Those 20 million members represent more than a third of all Americans in Medicaid managed care plans, according to ACAP.
In August, ACAP reported that its member health plans contributed more than $175 million to support physicians, hospitals and community health centers (CHCs) that needed financial assistance during the pandemic. With those funds, the providers and CHCs paid for personal protective equipment, donated to food banks and food delivery services such as Meals on Wheels, and provided shelter for homeless members who had COVID-19 but were not hospitalized, ACAP reported.
Some of ACAP’s insurers have insured members in long-term care settings and others who need care at home. “We provide support for these members so they can stay at home or in nursing homes or other settings,” Murray notes. Some of those plans have had high hospitalization rates, and many of their members died of COVID-19, she says.
“Our plans actually lost a lot of members to COVID-19, and, as a result, they really took a hit financially,” Murray says. “But, at the same time, our plans make a lot of capitated payments to their physicians and sometimes to hospitals, and those payments allowed providers to maintain full operations throughout the year.”
ACAP members reported that the capitated payments to network physicians and hospitals have supported providers throughout the pandemic when revenue from fee-for-service payment withered due to lack of utilization. In addition, keeping physicians and hospitals solvent during a pandemic is in all health plans’ interests because it helps plans retain providers, which helps them to hold on to their insured members, as well.
Ceci Connolly, president and CEO of the Alliance of Community Health Plans (ACHP), agreed that one of the lessons learned from the pandemic was the value of capitated payment. ACHP has 24 nonprofit health plans serving 22 million insured members. ACHP’s member plans include powerhouses such as Geisinger Health Plan, Harvard Pilgrim Health Care and Kaiser Permanente.
Early last year, the CEOs of ACHP’s member plans feared the pandemic would last beyond a year and worked with their actuaries to prepare budgets over two years. “That’s a smart way for our plans to think about the challenges they would face in their operations and prepare to have the financial resources to cover the costs that could come up during an unprecedented level of uncertainty,” Connolly says.
“Uncertainty is challenging for actuaries because they’re supposed to forecast risk accurately over a certain time and then ensure that they have the dollars to care for all of the people in their membership,” she adds. “Over the years, they’ve [become] good at that because they understand the population and what are … the standard number of heart attacks and babies born and that kind of thing. But the pandemic provided an unexpected level of risk that no one could have predicted.”
More claims to come
Notwithstanding the COVID-19 vaccines, many health insurance experts are concerned about the cost of care related to COVID-19 infections and a potential surge that could create a double peak in costs and claims for services that Americans have put off. Using data from a PwC report on medical cost trends, CNBC reported that if most of the care that health plan members deferred in 2020 is delivered this year, medical costs could rise 10% above pre-pandemic levels. That would result in the highest rate of medical-cost inflation since 2007, CNBC stated.
Large employers also are bracing for huge bills from deferred care, CNBC reported, citing the results of a survey from the American Benefits Council. “Large self-insured employers worry that delayed treatment this year will result not only in a higher number of medical claims in 2021 but also higher overall costs for more acute care,” CNBC said.
The pandemic has scrambled predictions. If, as Connolly suggested, actuaries dislike uncertainly, they will loathe this assessment from PwC’s analysts: COVID-19 has created so much uncertainty that it’s difficult to say precisely whether medical-cost trends will be significantly lower or higher
Joseph Burns is an independent journalist in Brewster, Massachusetts, who covers healthcare.