Health Insurance Segment Mid-Year 2019 Profitability

September 12, 2019

Increased health care demands and expenditures continue to cause challenges for health insurance companies.  Notwithstanding, the U.S. health insurance industry remains profitable and competitive amidst pressure from a politically volatile backdrop.  While healthcare reform has caused increased challenges, it has also provided opportunity for health plans to continue to focus on shaping the future of healthcare.  In this brief, Mark Farrah Associates (MFA) compared second quarter, year-over-year profitability for the Individual, Employer-Group, Medicare Advantage and managed Medicaid health insurance segments.  Financial insights were gleaned from aggregated 2Q18 and 2Q19 National Association of Insurance Commissioners (NAIC) statutory financial data from MFA’s Health Coverage Portal™.

Individual Segment

Membership in the Individual healthcare sector continues to decline.  According to financial statements filed by insurers and estimates by Mark Farrah Associates, enrollment in individual medical plans totaled approximately 14.7 million as of June 2019 as compared to 15.4 million a year ago.  However, this segment has experienced notable financial improvement over the last couple years. For 2018, 73% of plans reporting a net underwriting gain was up from 50% in 2017, leading to record profitability for the segment.  MFA’s assessment of mid-year 2019 profitability for the Individual market indicates that the rapid growth in gains made in 2017 and 2018 are leveling off.

For second quarter 2019, premiums earned decreased 5.5% while medical expenses incurred increased 1.2% from second quarter 2018. On a PMPM basis, which accounts for changes in membership and reporting plans, premiums increased 1.1%, significantly lower than the 8.3% increase in health care services (medical expenses) incurred.  Through the first two quarters of 2019, the average medical expense ratio for this segment was 73.9%, as compared to 69% the previous year.   All of the top plans in the Individual segment reported higher medical expense ratios as of the end of 2Q19 vs 2Q18.

Mid-year Profitability - Individual Segment
	2Q2018	2Q2019	Change
Health Premiums   Earned	$38,098,453,104	$35,992,059,091	-5.5%
Health Care Services   Incurred	$26,292,316,787	$26,615,637,906	1.2%
Med Expense Ratio	69.0%	73.9%
Member Months	76,025,435	71,067,886	-6.5%
Premiums PMPM	$501	$506	1.1%
Health Care Expenses   PMPM	$346	$375	8.3%
Source: Health Coverage Portal™, Mark Farrah Associates, Quarterly Exhibit of Premiums, Enrollment and Utilization as reported in the NAIC Financial Statements

As Mark Farrah Associates has stated in past analytical briefs, double-digit annual increases in premiums are not sustainable.  So it is no surprise that midway through 2019, plans are only reporting a modest 1.1% increase in premiums PMPM, the lowest reported increase in premiums PMPM during the Affordable Care Act era.  

Employer-Group Segment

The Employer-Group risk segment has experienced declines in enrollment over the past few years, most likely as a result of the population of baby boomers leaving for Medicare.  However, with approximately 50.7 million members, this segment continues to be the primary source of health coverage in the U.S. and profitability has slightly improved so far in 2019.  For second quarter 2019, premiums earned increased 0.7% and medical expenses incurred slightly rose 1.7% from second quarter 2018.  On a PMPM basis, premiums earned have increased 5.3% over 2Q18, while health care services incurred increased by 6.4%.  The growth in premiums pushed the average medical expense ratio for this segment to 81.4% for 2Q19 up from 80.5% in 2Q18.

Mid-year Profitability - Group Segment
	2Q2018	2Q2019	Change
Health Premiums Earned	$80,268,719,725	$80,828,752,050	0.7%
Health Care Services   Incurred	$64,631,393,414	$65,758,633,568	1.7%
Med Expense Ratio	80.5%	81.4%
Member Months	181,703,593	173,696,699	-4.4%
Premiums PMPM	$442	$465	5.3%
Health Care Expenses   PMPM	$356	$379	6.4%
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) market penetration remains strong.  According to CMS Medicare Advantage enrollment reports aggregated by MFA in Medicare Business Online™, total Medicare Advantage plan enrollment is approximately 23 million. Health insurers continue to invest in MA growth opportunities for increased enrollment, revenue and profits as the number of people entering retirement increases each year.  Year-over-year second quarter profitability for this segment has also increased slightly.  MA plans will compete by offering new pricing and product options to beneficiaries with the Annual Election Period (AEP) for Medicare Advantage and prescription drug plans beginning October 15, 2019. 

Mid-year Profitability - Medicare Segment
	2Q2018	2Q2019	Change
Health Premiums   Earned	$95,381,136,770	$109,656,868,705	15.0%
Health Care Services Incurred	$81,552,708,305	$92,898,374,908	13.9%
Med Expense Ratio	85.5%	84.7%
Member Months	98,537,550	103,980,679	5.5%
Premiums PMPM	$968	$1,055	8.9%
Health Care Expenses PMPM	$828	$893	7.9%
Source: Health Coverage Portal™, Mark Farrah Associates, Quarterly Exhibit of Premiums, Enrollment and Utilization as reported in the NAIC Financial Statements

For second quarter 2019, premiums earned increased 15% and medical expenses incurred rose 13.9% from second quarter 2018.  On a PMPM basis, premiums earned increased 8.9% over 2Q18, while health care services incurred increased 7.9%.  The increase in medical expenses pushed the Medical Expense Ratio to 84.7%.

Managed Medicaid

Medicaid in the U.S. continues to be a health insurance behemoth as measured by enrollment, and continues to be the largest source of funding for health-related services for people with low income. In addition, Medicaid enrollment in Managed Care Organizations (MCOs) continues to increase due in part to Medicaid expansion and to states that have broadened their managed care programs to new regions.  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 2019, premiums earned increased 5.0% while medical expenses incurred increased 8.9% from second quarter 2018.  On a PMPM basis, premiums earned increased 5.8% over 2Q18, while health care services incurred increased 9.7%.  The increase in medical expenses pushed the Medical Expense Ratio up to 92% from 88.8% in 2Q18.

Mid-year Profitability - Managed Medicaid Segment
	2Q2018	2Q2019	Change
Health Premiums Earned	$94,897,374,009	$99,670,710,551	5.0%
Health Care Services   Incurred	$84,227,596,206	$91,709,445,029	8.9%
Med Expense Ratio	88.8%	92.0%
Member Months	231,540,680	229,849,391	-0.7%
Premiums PMPM	$410	$434	5.8%
Health Care Expenses   PMPM	$364	$399	9.7%
Source: Health Coverage Portal™, Mark Farrah Associates, Quarterly Exhibit of Premiums, Enrollment and Utilization as reported in the NAIC Financial Statements

Conclusion

At mid-year 2019, all four health care segments are signifying reduced levels of profitability for health insurers over 2018.  Due to the minimum MLR constraints placed upon the individual segment, the stagnation of premium growth along with the rise in the mid-year med expense rations is not surprising, especially after the underwriting gains reaped in 2018. While this analysis of mid-year segment performance sheds light upon profitability trends for 2019, final financial results will be revealed in the spring.  Mark Farrah Associates continues 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 expense 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 (EPEU) 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, premiums earned and member month data was estimated based upon the NAIC Statement of Revenue and Expenses due to incomplete or erroneous EPEU 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^TM, Medicare Business Online™, Medicare Benefits Analyzer™ and Health Plans USA™ —www.markfarrah.com.

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