Profits of Publicly Traded Health Plans Surge Amid Requests for Higher Rates

August 6, 2020

By Adam E. Block, Ph.D.
Kevin Van Dyke, M.P.P.

Article

Amid struggling providers, furloughs of essential workers, years of premium increases and record high earnings, for-profit health plans should consider options for directly helping their networks.

Introduction

The world has never seen a closure like there was by the national emergency on March 13, 2020.[i] In the United States, Broadway’s curtains were closed, Disney World was shut down and no visitors were permitted a glimpse of Grand Canyon National Park’s majestic beauty.[ii] Businesses in all 50 states and around the world were closed. Every public school in America has been essentially closed for over three months and many will likely remain closed this fall. The only place that was completely open for business was the hospital emergency department. The only sound on the streets of New York City and many of the hardest hit neighborhoods was sirens driving people to the hospital. This was validated by recent data from the Bureau of Economic Analysis which found that the US economy shrunk by 33% (annualized) in Q2 of 2020.[iii]

Today, all states have begun to open back up in measured ways, including opening outdoor spaces, restaurants for outdoor dining and stores for shopping, albeit with requirements that people wear masks when not eating or drinking and maintain the six feet of social distance. Parallel to these re-openings, many states, especially in the South and West, are seeing large increases in COVID cases. This has led to a spike in hospitalizations in these states.

COVID-19 brought normal hospital services to a halt. Because hospitals receive a large portion of revenue from elective surgeries,when these procedures came to a halt, even hospitals at full capacity with COVID-19 cases faced historic financial losses. A study by Phreesia found that while outpatient visits went from a 58% deficit in March to 11% deficit the week of June 14th they are still well below sustainable levels[iv] causing providers to request additional relief from HHS.[v]

Amid this financial distress, hospitals are also weighing the trade-off between economic recovery and the risk of increased infections within their doors.[vi] Eager to resume elective surgeries to make up for revenue losses, hospitals must weigh concerns over capacity, staffing, and personal protective equipment, especially in hot spots.[vii]

What was the government’s response?

To support these financial issues, the federal government allocated $175 billion in grants to health care providers in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.[viii] However, by early June, only about $50 billion of those funds had been distributed. Since the funds hospitals received were proportionate to their share of Medicare revenue, HHS sent the bulk of the funds to the nation’s largest hospitals and health systems, regardless of financial performance or the impact of COVID-19 on hospital revenue.[ix],[x] Approximately 38% of Medicaid providers received no funds from the original grant distribution.[xi]

However, HHS has announced additional aid to fill in these gaps. On June 9, HHS announced they would distribute approximately $15 billion to eligible Medicaid and CHIP providers that participate in state programs that did not receive payment from the Provider Relief Fund General Allocation, and $10 billion to safety net hospitals.[xii] On July 10, HHS announced another $4 billion in Provider Relief Funds to financially vulnerable hospitals serving high-risk populations, specialty rural hospitals, urban hospitals meeting rural Medicare criteria, and hospitals in small cities.[xiii] Additionally, on July 17, HHS announced it would begin distributing another $10 billion from the Provider Relief Fund to hospitals in areas hit especially hard by the pandemic.[xiv]

How has this affected primary care practices?

Primary care organizations were struggling even before the pandemic and independent providers are struggling to survive, and most have received no direct federal funding.[xv] Nearly half of primary care organizations have laid off or furloughed workers, and many do not know if they will be able to stay open for another month. Researchers at Harvard University and Phreesia found a 40% decline in outpatient visits between March and June, 2020.[xvi] Atrius health which performs 745,000 visits a year had a 38% drop in total visits in May, relative to its weekly average pre-COVID.[xvii] Most businesses, particularly the smallest providers, cannot survive a revenue reduction of this magnitude, so many are looking to be acquired, continuing a recent trend where hospitals, insurers and private equity are acquiring small physician practices who are stable sources of revenue.[xviii]

How have hospitals been affected?

Since the pandemic began in the United States in March, at least 10 small, ruralhospitals have closed in West Virginia, Tennessee, Kansas, and more.[xix] More than 40 hospitals that have either closed or filed for bankruptcy in 2020 (as of June 22)[xx] adding to the more than 129 rural hospitals that have closed since 2010.[xxi] An additional $3B in funds was added to support safety net hospitals.[xxii]

Since spring 260 hospitals announced they are furloughing workers.[xxiii] Meanwhile, Fitch Ratings, which rates hospitals’ ability to access capital in the bond markets, predicted “the worst [quarter] on record for most [hospitals].”[xxiv] And in May changed the sector’s outlook from stable to negative.

How have health plans been affected?

Large, for-profit health plans are enjoying their best financial quarters in history.

Source: Company Q2 2020 10-K filings

UnitedHealth Group’s Q2 earnings improved doubled from Q2 2019 to Q2 2020. Overall, the five major for-profit health plans that released Q2 data by July 31, 2020 more than doubled their profits relative to Q2 2019.

Can for-profit insurers have it both ways? Record profits and rate Increases?

Earnings results indicate that health plans are spending far less on medical expenses during COVID-19 than they would otherwise and retaining earnings on reduced utilization. A model from the Society of Actuaries projected each month of lockdown leads to a 4% drop in medical expenditures for insurer with half of the drop delayed and half never utilized.[xxv]Meanwhile a Moody’s analysis found at a 10% COVID-19 infection rate in the US, insurers would remain profitable at current premiums.[xxvi]At the same time, AHIP was requesting a federal bailout on behalf of health plans.[xxvii]

The early summer months begin the rate review process for 2021 ACA exchange plans in many states, the market is confused and inconsistent.Rate increases in Maryland, Michigan, the District of Columbia, Oregon and Washington were all below 1% all reflecting the expected reduction in medical spending.[xxviii] However, in New York State the average request was 11.7% with OSCAR and Fidelis, two of the largest players, each requesting a 19% rate increase on average.While some insurers such as United and Anthem have pledged to return in excess of $1billion to consumers or providers,[xxix] this is voluntary and there is currently no mechanisms in place to ensure that billions in government paid premiums to Medicaid Advantage plans, Medicare Advantage plans and other government lines of business do not flow directly from taxpayer funded premiums to corporate shareholders profits. Without action this will lead to an increase in disparities in access for our most vulnerable Americans with a disproportion effect on ruralpopulations and people of color, the latter who are already being disproportionately killed by COVID-19 due to many systematic issues inside and outside of our health care system.

Conclusions

Hospitals are closing, primary care organizations and other hospitals are being sustained by government relief and providers are subjected to furloughs, pay cuts and lay-offs after stepping up, putting workers and providers at risk and confronting COVID-19 for the benefit of the patient community. Meanwhile lockdowns have slowed elective surgery and outpatient visits dramatically, but some for-profit health plans have had their most profitable quarter of all times, profiting from hospital revenue losses. Amid furloughs of essential workers, years of premium increases and record high earnings, for-profit health plans should consider options for directly helping their networks, who are, in effect, the public-facing aspect of the health plans. Others have recommended this direct action in the past in April[xxx], May[xxxi], and July[xxxii].If the opportunity to take voluntary action in an election year is not taken, it is possible that these types of actions will become mandatory (and more draconian) after the November elections.

[i] https://www.whitehouse.gov/presidential-actions/proclamation-declaring-national-emergency-concerning-novel-coronavirus-disease-covid-19-outbreak/

[ii] https://www.nps.gov/grca/learn/news/grand-canyon-national-park-closed-04-01-2020.htm

[iii] https://www.bea.gov/news/2020/gross-domestic-product-2nd-quarter-2020-advance-estimate-and-annual-update

[iv] https://www.commonwealthfund.org/publications/2020/jun/impact-covid-19-pandemic-outpatient-visits-practices-adapting-new-normal

[v] https://www.modernhealthcare.com/finance/hhs-send-10-billion-round-two-relief-grants-covid-19-hot-spots

[vi] https://subscriber.politicopro.com/health-care/article/2020/07/hospitals-recovery-plans-clash-with-new-covid-infections-1966288

[vii] https://www.modernhealthcare.com/providers/providers-re-examine-offering-elective-surgeries-covid-19-cases-surge

[viii] https://www.kff.org/coronavirus-covid-19/issue-brief/distribution-of-cares-act-funding-among-hospitals/

[ix] https://www.reuters.com/article/us-health-coronavirus-hospital-billions/billions-in-covid-relief-go-to-biggest-hospital-chains-as-smaller-rivals-await-aid-idUSKBN23G1GI

[x] https://www.kff.org/health-costs/issue-brief/distribution-of-cares-act-funding-among-hospitals/?utm_campaign=KFF-2020-Health-Costs&utm_source=hs_email&utm_medium=email&utm_content=87886305&_hsenc=p2ANqtz--5H_dI5ybM9j7dEUcpNHIhhhSIhGZKuiOyCgdpPdMkmJ65llIkF9D8sYDfor_aNPAh8_2CoURE3ISuaDmzFepJuTo2FQ

[xi] https://www.modernhealthcare.com/policy/hhs-new-35-billion-grants-target-medicaid-safety-net-hot-spot-providers

[xii] https://www.hhs.gov/about/news/2020/06/09/hhs-announces-enhanced-provider-portal-relief-fund-payments-for-safety-net-hospitals-medicaid-chip-providers.html