Insurers have finally figured out how to make money in the Obamacare markets: Charge more.
After taking a beating for three years, health plans jacked up their rates for 2017, with the average premium on the most popular products rising more than 20 percent. That created sticker shock for many Obamacare customers while putting many insurers on pace to record profits this year for the first time, according to a POLITICO analysis of 31 regional Blue Cross Blue Shield plans, many of which dominate Obamacare markets in their states.
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But the turnaround comes just as Republican efforts to dismantle the health law are creating new threats to the viability of the marketplaces. That leaves the plans in a bewildering situation, trying to improve their margins while the GOP declares Obamacare a failure and mounts another push to dismantle the system, starting with rolling back the health law’s individual mandate.
“The political narrative is over a market in crisis and that’s just not how the market actually looks right now,” said Larry Levitt, senior vice president for special initiatives at the Kaiser Family Foundation, a nonpartisan research group. “At this moment, the individual insurance market looks quite stable and most insurers have achieved profitability.”
The POLITICO analysis shows that insurers on average spent 78 percent of premium revenues on customers’ medical claims through the first nine months of this year.
That’s well ahead of the 85 percent threshold that’s typically viewed as a rough break-even point for carriers doing business in the individual market. And it’s far better than health plans have fared in prior years under Obamacare.
A similar analysis of regional Blues by Standard & Poor’s last year showed that medical claims consumed more than 90 percent of premium revenues through the first nine months of 2016, and exceeded 100 percent through the first three quarters of 2015.
The financial improvement is particularly stark for some of the biggest regional Blues.
Health Care Service Corporation, which has 1.2 million individual market customers across five states, including Texas and Illinois, spent just 70 percent of premium revenues on medical costs through the first three quarters of this year. That’s a vast improvement over last year, when nearly 90 percent of premium dollars went to medical costs through September. The prior year was even worse: Medical costs equaled 105 percent of revenues through the first nine months of 2015, which translated into huge losses on that segment of the business.
The turnaround has been just as stark for Blue Cross and Blue Shield of North Carolina, which had publicly threatened to pull out of Obamacare after initially sustaining huge losses. The insurer spent less than 70 percent of premium revenues on medical claims for its more than 500,000 customers through the first nine months of this year. In the previous year, medical claims approached 90 percent of premiums through the first three quarters, while they topped 100 percent through September of 2015.
All but five of the 31 regional Blues have better operating margins through the first three quarters of this year than they showed at corresponding points in either 2015 or 2016, according to POLITICO’s analysis. Altogether, the 31 regional Blues had 4.6 million individual market customers at the end of September. Those members paid premiums of $22.2 billion while accruing medical claims of $17 billion.
“This is the backbone of the segment right now,” said Kathy Hempstead, who oversees coverage programs for the Robert Wood Johnson Foundation, of the regional Blues. “They have figured out how to do business here.”
The turnaround follows three years of financial bloodletting for insurers in the Obamacare markets. McKinsey estimates that the carriers lost more than $12 billion in just 2015 and 2016. Many national insurers — including UnitedHealth Group and Aetna — largely abandoned the marketplaces after sustaining big losses.
The biggest reasons for the sea of red ink: Insurers underestimated the cost of covering those who enrolled, and too few younger, healthier Americans signed up for coverage.
But there have been other unexpected factors that contributed to the financial turbulence. Congressional Republicans insisted that a program designed to protect insurers with particularly expensive customers from big financial losses be budget neutral. That’s led to a roughly $12 billion shortfall in payments to health plans.
In addition, an Obama administration’s decision to allow plans that don’t meet the Affordable Care Act’s coverage requirements to remain in place — following an outcry over canceled plans — cut off a large pool of potential customers for ACA-compliant plans. The Trump administration has maintained that policy of allowing non-compliant plans to remain in place.
There is likely to be some erosion in the insurers’ financial performance during the final three months of this year. Medical claims as a share of premiums are almost certain to increase in the final quarter of the year. That’s because more customers will be maxing out their deductibles, meaning insurers will have to cover a bigger share of costs.
In addition, President Donald Trump’s decision to cut off subsidy payments that insurers rely on to reduce the costs for low-income customers means plans will take a more than $1 billion financial hit, according to the National Association of Insurance Commissioners.
Republicans efforts to dismantle the law, including a potential repeal of the individual mandate as part of the tax bill, H.R. 1 (115), currently being debated on Capitol Hill, are creating further uncertainty about the future viability of the markets.
“There’s so much speculation. We have to kind of wait to see what actually happens,” said Greg Thompson, a spokesman for Health Care Service Corporation. “Things are very, very fluid at this point in time.”
Obamacare anticipated that health plans would need about three years to adjust to the fledgling markets. The path has been much bumpier than expected.
The markets in many states remain in perilous shape. Nearly half of all counties nationwide have just a single insurer selling Obamacare plans next year. And insurers jacked up rates by eye-popping amounts again for their 2018 plan years.
But a healthy chunk of those increases can be attributed to Trump’s decision to cut off subsidy payments and uncertainty about the future of the marketplaces. The landscape may have looked much different without those aggravating factors.
“A lot of them would have put across some pretty modest rate increases, and we would have had a harbinger of a pretty good market next year,” Hempstead said. “That’s what this kind of performance would suggest.”
Tucker Doherty contributed to this report.