Four reasons insurance exchange plans are struggling

After suffering significant losses on the health insurance exchanges in 2015, insurance giants UnitedHealth Group and Aetna announced recently that they may leave the exchanges next year.

Perhaps making the first move, UnitedHealth Group announced in April that it plans to exit all but a “handful” of exchanges in 2017, with departures that include the Georgia, Arkansas, and Michigan insurance exchanges.

The news that plans may bow out of the exchanges does not surprise Sally C. Pipes, president of the San Francisco-based Pacific Research Institute.

Pipes“UnitedHealth lost $720 million on 500,000 enrollees last year and is expecting an additional loss of $500 million this year,” says Pipes. “Aetna’s CEO recently voiced serious concerns about the sustainability of exchanges and the overall stability of the risk pool after losing $140 million last year. Humana, Blue Cross and Blue Shield have also reported losses in the millions.”

In its fourth quarter and full year 2015 earnings conference call in February, Tom Cowhey, vice president of Investor Relations for Aetna Inc., called the exchanges unprofitable for Aetna last year and expressed serious concerns about their sustainability. Specifically, Aetna is concerned about:

• Overall stability of the risk pool, including enforcement of standards related to Special Election Period enrollment;

• Lack of predictability and full transparency of the risk adjustment program; and

• Newly proposed CMS regulations on network adequacy and standardization of benefits that would limit its ability to offer affordable, innovative exchange products.

However, Cowhey indicated that Aetna will continue to work constructively with CMS and lawmakers to “set this program on a more sustainable path and achieve the underlying goal of making healthcare more affordable and accessible.”

In May, an Aetna spokesman told The Wall Street Journal the insurer has no plans to withdraw its existing plans in state exchanges.

Next: Factors behind the losses

Factors behind the losses

HelmanEric Helman, chief strategy officer for Hodges-Mace, an employee benefits technology and communications company in Atlanta, says the root cause for the losses is prices that did not match the risk profile of those who bought coverage on the exchange.

“Whether the plans were priced wrong or only the bad risk showed up is a matter for debate, but the bottom line is that the total premiums did not cover the total claims,” he says. “As a result, patients who purchase their coverage on the individual market will see their premiums go up and the number of choices go down.”

Duane Harrington, managing director and leader of the healthcare practice at AArete, a management consulting firm in Chicago, says that examining the factors impacting an insurer’s profitability or losses is an important step in forecasting the future of exchange participation. Four of the key factors that he says deserve a closer look are:

1. Difficulty estimating future costs. When considering profitability, it’s important to consider the premiums as well as the costs, says Harrington. “With regard to the premiums, there have been fairly significant swings from year-to-year.”

For example, in 2016, premium changes on health insurance exchanges ranged from a 10.6% decrease in Seattle, to a 38.4% increase in Nashville. While the overall weighted change is estimated to be an increase of 3.6%, and a 0.7% decrease when factoring in tax credits, the amount of variability suggests insurers are still working to estimate the cost to manage the risk pool of the enrollees, according to Harrington.

2. Healthcare cost growth. “It is generally agreed upon that healthcare costs will continue to rise,” Harrington says. “However, structural changes to the healthcare payment and delivery system, as well as overall economic environment, are factors that suggest the growth of healthcare costs may ultimately slow.”

3. Phasing out of the transitional reinsurance program. This subsidy was $10 billion in 2014, but drops to $4 billion in 2016, and will be completely phased out in 2017, says Harrington. As these subsidies go away, insurers must take on greater amounts of risk.

4. High turnover and pent-up demand. Typically, there is considerable turnover in the exchange population as enrollees move between individual and employer group insurance. In addition, there has always been speculation that pent-up demand for services exists within this member group. This can make it difficult for insurers to predict costs. “When you have uncertainty in a risk pool, insurers will account for uncertainty with higher premiums, but this must be balanced against making sure they’re competitively priced,” says Harrington.

Next: Broader implications

Broader implications

Under current rules, managed care organizations can pick and choose which markets and which regions they offer coverage. This will inevitably lead to disparity on the cost and availability of coverage options in some markets.

“We are beginning to see state regulators encourage managed care companies to participate in low-profit markets-Medicaid and Individual-so that they can also play in higher profit segments-Medicare and Small Business,” says Helman. “Given the pending mega-mergers, some players may continue to play in the short term to gain approval for their transactions.”

If multiple insurers do end up leaving the exchanges, Pipes worries the burden will be even greater for those that remain, making it even less feasible for the exchanges to continue. 

“One of the reasons for the losses is that 18 to 34 year olds have not signed up for coverage at the rate the administration predicted,” she says. “To make the exchanges sustainable, this group needed to make up 40% of enrollment on the exchanges, but has only reached 28%. Young people are choosing to pay the penalty instead of costly premiums.”

Helman adds that while narrow networks are one way payers can contain costs, new network adequacy rules could hinder plans’ ability to use networks to do so, and therefore, make it harder for their exchange plans to turn a profit.

Next: Future outlook

Evolving matters

Looking ahead, Helman believes the biggest challenge for exchanges is who will provide the products. “Patients who receive subsidies are insulated from high prices, but they must have a product to buy. Either managed care companies will be forced to play or the government will have to manufacture a product to ensure something is on the shelf to purchase.” 

HarringtonOverall, Harrington expects to see the exchange business stabilize as insurers have more experience to draw from. However, simply raising premiums won’t be the answer for those plans that are experiencing losses, he says. “Those plans need to look more closely at the root causes of those losses and ask themselves, ‘How are other plans making money?’”

He says the answers may not be consistent as each market and state has varying levels of competition. States such as Michigan, Ohio, Texas, Pennsylvania, Wisconsin, Florida, Arizona, and Illinois all reported having 10 or more issuers in their 2015 state marketplaces. Other states such as Alabama, Maine, Mississippi, North Carolina, and West Virginia reported three or fewer.

“Insurers experiencing losses need to take a closer look as to why it’s happening,” says Harrington. “Do they not have competitive rates? Did they experience a one-time higher than expected costs due to pent-up demand, or is the medical trend simply different for certain member profiles? What profiles are they attracting on the exchange?”

The simple answer, he says, may be that their capabilities do not match up well for the exchange market, and if that’s the case, they should exit the business. “However, if they truly want to stay in the market and perform well, they can’t simply say the exchange structure isn’t working as there are other insurers that are doing quite well.”

Daniel Casciato is a freelancer from Pittsburgh.

Note: This article has been slightly modified from its original version to reflect more current information related to health plan participation in health insurance exchanges.