This has been a turbulent year for the Affordable Care Act (ACA) marketplaces. As part of our ongoing efforts to better understand how the post-ACA insurance markets are evolving, we reviewed the 2016 second-quarter (Q2) earnings calls and financial filings of several large, publicly traded insurers that participate on the marketplaces: Aetna, Anthem, Centene, Cigna, Humana, Molina, and United.1 While the picture provided by these calls and financial reports is limited – dozens of other participating insurers are not required to report to investors because of their nonprofit or private status – they can help us better understand some of the trends affecting the marketplaces’ stability, including insurer exits from some health insurance marketplaces and increases in 2017 premiums.
Our review of first quarter (Q1) earnings calls found that four of the seven insurers reported an ongoing commitment to the marketplaces. Since then, one of the four – Aetna – has announced it will pull out of 11 of the 15 of the health insurance marketplaces where it is currently offering coverage, reducing its footprint from 778 to 242 counties.2
Aetna executives hinted at this move during its Q2 earnings call, in which executives reported, among other concerns, their disappointment at federal opposition to the proposed acquisition of Humana, significant losses on their ACA business, and an effort to reevaluate their marketplace presence. However, the most recent round of earnings calls in their entirety reflects the significant diversity of experience among the publicly traded companies, as well as their diverse approaches to managing costs and serving the marketplace population.
Insurers’ Experiences: A Mixed Bag
As they did in Q1, several companies reported losses on their individual market business, both on and off the marketplaces. Not surprisingly, United, which announced its departure from most ACA marketplaces earlier this year, reported continued losses. It expects to participate in “three or fewer” marketplaces in 2017. Humana also confirmed its intention to significantly reduce the number of marketplaces in which it participates in 2017.
While Cigna and Anthem reported losses from their individual market business, neither insurer has yet signaled a retreat from the ACA marketplaces, although Anthem indicated that it is waiting for premium rate approvals from state regulators before making final decisions. Cigna has told investors that they expect to improve their profitability in the marketplaces next year and over the long-term, while acknowledging that the marketplaces are still “volatile.” Centene reported “favorable” and Molina “satisfactory” experiences on the ACA’s marketplaces. Centene suggested they would look to expand in 2017 and beyond.
Factors Affecting Performance: Knowing Your Audience and Managing Costs
Centene and Molina attributed their financial success in this market in part to their strategy of targeting the lowest-income marketplace enrollees, some of whom may experience fluctuations in income that move them above or below the income threshold for Medicaid eligibility. Both companies have considerable experience in the Medicaid markets. This may give them a leg up over some competitors in understanding the health status and utilization patterns of this population. Further, their targeted enrollees are the most heavily subsidized, making them more likely to enroll and less likely to drop their plans than those who must pay a higher proportion of the premium and cost-sharing. Centene and Molina also are keeping costs low through narrow provider networks, often paying providers less than traditional commercial insurer reimbursement rates.
A Tale of Two Risk Pools: Are Marketplace Enrollees Getting Healthier or Sicker?
Both Molina and Centene reported that they are enrolling a relatively healthy population. “We’re not seeing a huge number of chronically ill members,” Molina executives stated. But their competitors reported just the opposite, asserting high and growing health care costs among their marketplace enrollees. This observation is at odds with a recent report from the federal Centers for Medicare and Medicaid Services (CMS). According to CMS’s analysis of marketplace claims data between 2014 and 2015, the marketplace risk pools became healthier, with cost trends actually lower than the broader health insurance market.
Why the disconnect? One possibility is that some companies flubbed their projections – they expected a healthier population than they got. It’s also possible that, while the overall marketplace population has become healthier, these companies attracted a greater share of sick enrollees than their competition. If that’s the case, then, at least in theory, the ACA’s risk-adjustment program should help compensate them for their sicker-than-average risk pool.
Risk-Selection Challenges and Managing Costs
Several of the companies expressed concerns that plans with sicker-than-average enrollees are not being adequately compensated through with the ACA’s risk-adjustment mechanism. These companies applauded CMS’s promise to make changes to the risk-adjustment formula. However, they also pointed to other risk-selection challenges on the marketplaces, including concerns that providers paying the premiums for chronically ill patients, special enrollment opportunities, and the 90-day grace period for nonpayment of premiums are leading to a sicker group of enrollees in the marketplaces. Insurers have asked CMS to implement policy changes to address these concerns.
The Q2 earnings calls also highlighted the companies’ efforts to manage costs – and indicate that the trend toward narrow provider networks will continue. Aetna and Cigna executives have suggested that, while traditional plan designs may be losing money, products with “tight narrow networks” and “focused and aligned . . . delivery systems” appear to be performing well on the marketplaces.
The ACA dramatically changed the rules for insurers – ending discrimination against people with preexisting conditions and creating a new market in which companies must compete head-to-head for consumers’ premium dollars. The financial reports of these seven companies indicate that some companies are adapting well to this new market and others have struggled. We will likely to see continued volatility in this market as insurers adjust their marketing, pricing, and product design strategies.
1 Because of its proposed merger, Humana (merging with Aetna) did not host a quarterly call. For purposes of our analysis, we reviewed the companies’ press releases and financial reports. Insurer WellCare was not included in this analysis because of its limited participation in the marketplaces.
2 Aetna has said it will continue to sell individual market products outside of the marketplaces in “the vast majority of counties where it offered” them in 2016.