Mid-Year 2018 Health Insurance Segment Profitability Insights

September 10, 2018

In an era when healthcare is at the forefront of legislative debate and the only consistent aspect of the system is that there isn’t any consistency at all, health insurers continue to wade through the perpetual political turmoil as they strive to remain competitive and profitable.  While healthcare reform has caused increased pressure and challenges for carriers, health companies continue to adapt.  Change has also created opportunity where many companies have increased a geographic footprint, added new business and acquired other companies through mergers and acquisitions.  In this brief, Mark Farrah Associates (MFA) compared second quarter, year-over-year profitability for the Individual, Employer-Group, Medicare Advantage and managed Medicaid segments.  Financial insights were gleaned from aggregated 2Q17 and 2Q18 National Association of Insurance Commissioners (NAIC) statutory financial data from MFA’s Health Coverage Portal™. 

Individual Business

The Individual health insurance market, both on and off the exchange, continues to experience its fair share of challenges.  The volatility of the Affordable Care Act's (ACA’s) exchange program has historically been unsustainable due to increased medical claims and premiums, adverse selection and immature risk pools which forced several insurers to withdraw from the Marketplace.  Additionally, at the beginning of 2018, revisions to the law such as the elimination of the individual mandate and expansion of association health plans have created more noise that insurers need to adjust to before payer profitability is impacted.  However, things appear to be looking up for the on-exchange individual market and this segment is beginning to show some signs of stability.  Many leading insurers reported experiencing more favorable financial results for their exchange business in 2018 and some are considering expansion plans for 2019.  Furthermore, there have been no mentions of exits thus far, and a projected 13 states could potentially see expansion for next year.   

2017 marked a turn towards profitability with 50% of plans reporting a net underwriting gain leading to overall profitability for the segment.  MFA’s assessment of mid-year 2018 profitability for the Individual market indicates continued improvement.  For second quarter 2018, premiums earned decreased 1.6% while medical expenses incurred decreased 9.8% from second quarter 2017. However, initial quarterly reporting did not contain a significant segment leader at the time of the writing of this brief.  It is expected that quarter-over-quarter premium income will show growth when reporting is complete.  On a PMPM basis, which accounts for changes in membership and reporting plans, premiums increased 17.4%, significantly outpacing the 7.6% increase in health care services (medical expenses) incurred.  Through the first two quarters of 2018, the average medical expense ratio for this segment was 70.8%, as compared to 77.2% the previous year.   All of the top plans in the Individual segment reported improved medical expense ratios as of the end of 2Q18 vs 2Q17.

Mid-year Profitability - Individual Segment
	2Q2017	2Q2018	Change
Health Premiums Earned	$34,275,784,796	$33,715,649,778	-1.6%
Health Care Services   Incurred	26,455,052,417	23,860,239,245	-9.8%
Med Expense Ratio	77.2%	70.8%
Member Months	82,674,688	69,293,606	-16.2%
Premiums PMPM	415	487	17.4%
Health Care Expenses   PMPM	320	344	7.6%
Source: Health Coverage Portal™, Mark Farrah Associates, Quarterly Exhibit of Premiums, Enrollment and Utilization as reported in the NAIC Financial Statements

Financial improvement seen in 2017 has continued into 2018 based upon reporting plans. However, double-digit annual increases in premiums are not sustainable, and it is clear that change is needed in the segment.  How much of this change will be driven by federal and state action vs market forces will be interesting to watch in the coming months and years.

Employer-Group

With approximately 52 million members, the Employer-Group risk segment continues to be a dominant source of health coverage in the U.S.  However, due to many employers shifting to self-insured models and the loss of the retiring baby boom population from the workplace, this segment has seen some declines in membership over the past few years which have continued in 2018.  Profitability in the segment has improved slightly so far in 2018.  For second quarter 2018, premiums earned decreased 10% and medical expenses incurred slightly fell 11% from second quarter 2017.  However, initial quarterly reporting did not contain a significant segment leader at the time of the writing of this brief. It is expected that quarter-over-quarter premium income will show slight growth when reporting is complete.  On a PMPM basis, premiums earned have increased 3.8% over 2Q17, while health care services incurred increased by 2.7%.  The growth in premiums pushed the average medical expense ratio for this segment down to 80.9% for 2Q18 from 81.8% in 2Q17.

Mid-year Profitability - Group Segment
	2Q2017	2Q2018	Change
Health Premiums Earned	$78,750,789,513	$70,888,340,094	-10.0%
Health Care Services   Incurred	64,397,628,439	57,361,257,954	-10.9%
Med Expense Ratio	81.8%	80.9%
Member Months	185,976,845	161,301,575	-13.3%
Premiums PMPM	423	439	3.8%
Health Care Expenses   PMPM	346	356	2.7%
Source: Health Coverage Portal™, Mark Farrah Associates, Quarterly Exhibit of Premiums, Enrollment and Utilization as reported in the NAIC Financial Statements

Medicare Advantage

Medicare Advantage (MA) continues to demonstrate steady growth year-over-year amidst healthcare tumult.  In April of 2018, the Centers for Medicare and Medicaid Services (CMS) issued final updates to the Medicare Advantage and Part D Prescription Drug programs for 2019 in its Final Rule with continued efforts to regulate policies and provide more flexibility for MA and PDP programs. Some major provisions for CY 2019 include changes to benefit uniformity requirements, marketing rules and the star rating process.  A summary of the key provisions can be reviewed here.  In addition, a 3.4% on average rate increase is expected for Medicare Advantage and Part D plans in 2019, a significant increase from the 1.84% percent rate increase proposed in the February Advanced Notice and Draft Call Letter.  With the Annual Election Period (AEP) for Medicare Advantage and prescription drug plans beginning October 15, 2018, MA plans will compete by offering new pricing and product options to beneficiaries.

Mid-year Profitability - Medicare Segment
	2Q2017	2Q2018	Change
Health Premiums Earned	$85,417,403,673	$93,940,607,960	10.0%
Health Care Services   Incurred	73,550,418,241	80,138,301,336	9.0%
Med Expense Ratio	86.1%	85.3%
Member Months	89,224,505	97,086,633	8.8%
Premiums PMPM	957	968	1.1%
Health Care Expenses   PMPM	824	825	-0.1%
Source: Health Coverage Portal™, Mark Farrah Associates, Quarterly Exhibit of Premiums, Enrollment and Utilization as reported in the NAIC Financial Statements

For second quarter 2018, premiums earned increased 10% and medical expenses incurred rose 9% from second quarter 2017.  On a PMPM basis, premiums earned increased 1.1% over 2Q17, while health care services incurred decreased 0.1%.  The increase in medical expenses pushed the Medical Expense Ratio down to 85.3%.

Managed Medicaid

As of June 2018, CMS reported 73.4 million beneficiaries were enrolled in Medicaid and the Children's Health Insurance Program (CHIP).  Approximately 66% of these members are enrolled in managed care organizations (MCOs), which have gained in popularity over the past couple years due to ongoing attempts to reform the Medicaid program under the Trump administration.  Since the Medicaid sector remains a health insurance industry behemoth, it consistently continues to evoke unending controversies by policy makers. Many of the topics of debate continue to focus on additional state expansion efforts, Section 1115 waiver proposals that impose work requirements, and increasing initiatives of more states moving beneficiaries to managed-care plans.  

Accordingly, as a result of the increasing Medicaid population over the years, many health plans have been dependent on Medicaid contracting for growth in revenue and profitability.  For second quarter 2018, premiums earned increased 3.8% while medical expenses incurred increased 1.0% from second quarter 2017.  On a PMPM basis, premiums earned increased 0.9% over 2Q17, while health care services incurred increased 2.9%.  The increase in medical expenses pushed the Medical Expense Ratio down to 88.6% from 91.0% in 2Q17.

Mid-year Profitability - Managed Medicaid Segment
	2Q2017	2Q2018	Change
Health Premiums Earned	$89,858,750,523	$93,236,100,191	3.8%
Health Care Services   Incurred	81,771,399,722	82,615,303,841	1.0%
Med Expense Ratio	91.0%	88.6%
Member Months	225,893,355	227,815,900	0.9%
Premiums PMPM	398	409	2.9%
Health Care Expenses   PMPM	362	363	0.2%
Source: Health Coverage Portal™, Mark Farrah Associates, Quarterly Exhibit of Premiums, Enrollment and Utilization as reported in the NAIC Financial Statements

Conclusion

At the mid-year point, all four health care segments are signifying improved profitability for health insurers over 2017.  The most significant change is once again in the Individual segment showing improvement over 2017, which ended up being a profitable year for the segment overall.  While this analysis of mid-year segment performance sheds light upon profitability trends for 2018, it’s a wait and see proposition until final financial results are revealed in spring of 2019.  Mark Farrah Associates will continue to analyze and report on important health insurance segment performance and related topics. Stay tuned for future analysis briefs with valuable insights about the health care industry.

About Our Analysis

Medical loss ratio is calculated by dividing health care costs/claims incurred by premiums earned.   This ratio indicates the amount of premium dollars spent on medical expenses.  The higher the ratio, the less room there is for the plan to pay for its administrative costs, potentially impacting profitability.  Per member per month (PMPM) calculations are also used to determine the amount of premium dollars earned and the amount of medical costs incurred for each member on a monthly basis.  These calculations are performed by dividing premiums or medical claims incurred by the number of reported member months for the plan.

Data for this analysis was sourced from Mark Farrah Associates’ Health Coverage Portal™, Quarterly Exhibit of Premiums, Enrollment & Utilization as reported in the NAIC Financial Statements.  Approximately 80% of the health insurance market is represented within the exhibit.  Managed Medicaid plans & California HMO plans that do not report to the NAIC, along with NAIC-reporting Life, Accident & Health, and Property & Fraternal Insurance plans do not file the exhibit.  In order to improve the accuracy of our assessment, member month data was estimated due to incomplete reporting by a small number of plans.

About Mark Farrah Associates (MFA)

Mark Farrah Associates (MFA) is a leading provider of health plan market data and analysis tools for the healthcare industry.  If your company relies on accurate assessments of health plan market share to support business planning, we encourage you to contact us to learn more about our products.  Our portfolio includes Health Coverage Portal™, County Health Coverage™, Medicare Business Online™, Medicare Benefits Analyzer™ and Health Plans USA™ —www.markfarrah.com.

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