Time: D H M S

SURPRISE! Some insurers DID make a profit last year! (UPDATE: Hmmm...perhaps not after all...)

Between the #RiskCorridorMassacre which helped wipe out a dozen ACA-created Co-Ops and UnitedHealthcare's peculiarly-timed panic attack last month, the conventional wisdom is that the ACA exchanges are causing health insurance carriers to go bankrupt by the bedpan-full, sapping their precious bodily fluids like a woman having sex with Brigadier General Jack D. Ripper.

According to Mark Farrah Associates and Allison Bell of LifeHealthPro, however, it turns out that the reality isn't quite that lopsided:

Some insurers said they were doing fine, and the biggest insurers reported solid 2014 profits.

...Mark Farrah Associates (MFA) has now published a review of 2014 medical loss ratio (MLR) data that implies that carriers in some states might have done a good job of setting premiums at a high enough level to generate underwriting gains.

PPACA now requires carriers to spend 85 percent of large-group health revenue, and 80 percent of individual and small-group revenue, on health care and quality improvement efforts. Carriers that miss the mark, and earn what the government views as being too big of a profit margin, must send rebates to the enrollees.

Nationwide, the rebate total for all types of health coverage increased 42 percent between 2013 and 2014, to $478 million, according to the MFA analysts.

The size of the average rebate paid increased to $129, from $80.

...the analysts did find that seven of the top 10 carriers in the individual market had to pay rebates for their 2014 business. In the small-group and large-group markets, only half of the carriers had to pay rebates.

In other words, some insurance carriers lost a lot of money, some lost a little, some broke even, some made a little, and some made a lot.

You know...exactly the way that the "Invisible Hand of the Free Market" is supposed to work.

Now, it is true that the enormous disruption that the ACA brought to the individual market in particular is making things very uncertain and rocky the first few years of the law...which is exactly why the risk corridor program was created to help smooth the path for the first three years. Unfortunately, Marco Rubio and his colleagues decided to yank that particular rug out from under the carriers, leaving the ones who didn't do a perfect job of marking their territory to dangle in the wind.

UPDATE 12/29/15: Kudos to Allison Bell for following up on her story; it turns out that there are a couple of other factors at play here which blur the picture:

A mechanism that is supposed to make the medical loss ratio (MLR) rebate system steadier may skew the picture it gives of the U.S. health insurance market, and may be increasing health insurers' pain in bad years.

...Insurers made their first MLR rebate payments in 2012, for the 2011 plan year.

...Industry watchers are highlighting a regulatory shift mentioned by the MFA analysts, but overlooked by this reporter and missing from the latest Centers for Medicare & Medicaid Services (CMS) MLR rebate summary: For the first two years the MLR system was in effect, insurers could use one year of data to calculate rebates, but insurers are now supposed to use a rolling average of three years of data.

OK, that's a very important detail. As anyone who studies polling (or stock market trends, for that matter) can tell you, a rolling average can dramatically impact the overall results.

Let's say that an insurance carrier had the following MLRs:

  • 2011: 70%
  • 2012: 70%
  • 2013: 75%
  • 2014: 90%

I think this is how the program works: In 2012, they would base their rebates on 2011's 70%...and would have to pay back the 10 point difference. In 2013, they'd base it on 2012's 70%...and again would pay back the 10 point difference.

However, in 2014, they had to blend the three years together (2011, 2012, 2013) for an average of 71.7%...meaning they had to pay back 8.3 points, even though 2013 alone was a 5 point difference.

And this year, even though 2014 was ugly for the carrier (only a 10% margin vs. the 20% they're allowed to have), they'd officially be pegged at 78.3% MLR...meaning they'd have to pay back 1.7 points anyway.

In addition, that damned Risk Corridor mess comes into play here as well:

For 2014, insurers were also supposed to assume the PPACA risk corridors program would collect enough cash from the insurers paying into the program to cover all of its obligations. CMS officials now estimate the program will collect enough cash from thriving insurers to pay only about 13 percent of what it owes struggling insurers.

In addition, I should note that while this isn't mentioned in the update, the original article also notes that:

MFA analysts did not calculate separate totals for the individual, small-group and large-group markets, and they did not try to distinguish between MLRs for grandfathered coverage, fully PPACA-compliant coverage or other types of coverage.

In other words, a particular carrier might have made a tidy profit in their employer-sponsored divisions (small/large group) but lost a smaller amount of money in the individual market. Alternately, they may have made a hefty profit off of grandfathered/transitional policies last year...but lost a bundle on ACA-compliant ones (QHPs, for the most part).