Affordable Care Act delivers mixed financial results for insurers
The Affordable Care Act was widely expected to provide a major boost to the health care industry by swelling insurance rolls with new members and filling hospital beds with additional patients.
More than two years into full implementation of President Obama's national health reform, which greatly expanded coverage to the uninsured, financial results for insurers have been mixed.
Young and healthy people haven't signed up for coverage in the numbers that were hoped for, which has made it difficult for companies to make money selling plans to individuals through state and federal online marketplaces. A government program set up to cover most of the early losses of carriers selling in the marketplaces is not paying out as expected. And health plan rates are expected to continue to rise across the country, which could scare off some buyers.
“If we rewind 24 months, we had previously indicated that we thought the industry was well-positioned to deal with the ACA,” Joseph Zazzera, an analyst at rating agency A.M. Best, said in a research note.
Oldwick, N.J.-based A.M. Best rates insurers and this month downgraded its outlook on the industry to negative, from stable.
“The current operating environment has been a challenge for most health insurers and operating results have suffered.”
Some insurers are hinting that the marketplaces, also known as exchanges, could be unsustainable.
United Healthcare, the nation's largest health insurer by enrollment, has suggested it could pull out of the exchanges, which allow people who don't receive coverage through an employer to shop for a health plan. The company, which expects to lose about $500 million selling individual plans this year, “is not pursuing membership growth,” and has taken other steps to cut costs, including eliminating certain products, scrapping broker commissions and cutting its marketing budget.
“By mid-2016, we will determine to what extent, if any, we will continue to offer products in the exchange market in 2017,” Chief Financial Officer David Wichmann told analysts on a conference call to discuss financial results this month.
Anthem, the second-largest health insurer in the country, signed up 30 percent fewer customers through the marketplaces than it expected and is facing pressure to keep health plan prices at what it called unsustainably low rates, Chief Financial Officer Wayne DeVeydt said last week.
“Some of the pricing that we continue to see in our markets, our 14 states, is still well below what we think appropriate rates are for a sustainable environment,” DeVeydt told analysts on a conference call. The Blue Cross company does not offer exchange plans in Pennsylvania.
Anthem, which is in the process of acquiring smaller rival Cigna Corp., expects to make a small profit margin on its marketplace business this year.
Closer to home, Highmark Inc. dominated sales on Healthcare.gov in 2014, the first year of operation for the federal exchange, and had 350,000 marketplace members in Pennsylvania, Delaware and West Virginia last year. Yet it was flooded with older and sicker enrollees, who used more medical care than the insurer expected, said Alexis Miller, the company's senior vice president for individual and small group.
It also priced its health plans too low, Miller said, noting that in 2014 the insurer had some of the lowest-cost coverage in the nation.
“I think there was a bit of right-sizing of rates that we had to do,” she said. “Our rates were too low, period.”
The combination of low rates and members who used a lot of health care services led the company to rack up a loss of $318 million during the first half last year on its exchange business. The company “did not see an improvement in the latter half of 2015,” Miller said. Highmark is expected to release full-year financial results in a few months.
Highmark raised prices 10 percent, reduced the number of plans it sells and made its coverage more restrictive — all of which is expected to help the company lower costs.
Highmark and other companies also are hurting because they were expecting the federal government to cover some of their losses through the law's Risk Corridor program. But the program, which was created to encourage insurers to take the risk of selling marketplace plans, is underfunded and paying out only 12.6 percent of claims for 2014. It's unclear if the program will have any money for 2015 claims, said Sally Rosen, a vice president at A.M. Best.
“It doesn't look likely that there's going to be much paid out,” she said.
Highmark expected to receive about $220 million for its losses in 2014 and a similar amount for 2015, Miller said.
Despite the difficulties, she said Highmark wants to continue selling insurance through the marketplace.
“We are committed to this market as long as we can make it viable and sustainable,” she said.
Not all companies are having trouble managing the Affordable Care Act. UPMC said it's increasing membership through the marketplace with low-cost plans that keep patient volume high at its hospitals and in its doctor offices.
“As a combined system, we are satisfied with the implementation of the exchanges,” said Robert DeMichiei, UPMC chief financial officer. “As a provider, we welcome those volumes, keeping our hospitals full. ... As an insurer, we're doing well in a market that's young and evolving and will continue evolving.”
DeMichiei said UPMC is breaking even on its insurance plans, but making a profit when its insurance members receive treatment at the hospital system.
“That is the secret sauce that allows us to price it competitively,” he said. “Because we know we're going to be caring for those patients at our hospitals.”
UPMC reported operating profit of $72 million in the July-September quarter, a 23 percent decline from the same period a year earlier. The system's medical services division contributed $51 million of profit, while its insurance services division provided $21 million.
James LeBuhn, an analyst for Fitch Ratings Inc. in Chicago, said systems that have a large network of hospitals and doctors combined with a health insurance arm are poised to fare well under the Affordable Care Act.
“If you look at UPMC, they own the health plan, the doctors ... they're in a much better position to manage that population,” he said.
But the Fitch's outlook for the not-for-profit hospital sector is negative, LeBuhn said, because pressure to reduce the costs of medical treatment is expected to squeeze finances.
“We felt it was more important to remain negative because we think those headwinds are going to pick up speed and becoming challenging into 2017 and 2018,” he said.
Alex Nixon is a Tribune-Review staff writer.