Many of Moody’s rated companies have de-emphasized or exited their ACA businessPhoto: iStock

After collectively losing between $6.9 billion and $8.4 billion on the Affordable Care Act’s exchanges in 2016, insurers are adapting to the health care law’s challenges. But hurdles to individual market profitability remain, according to a Moody’s report issued Tuesday. 

After sustaining initial losses in the market’s early years, many of Moody’s rated companies have de-emphasized or exited their ACA business, according to the report. Companies remaining in the individual market have adapted by adjusting their geographic range, raising premiums and narrowing their provider networks. Moody’s analysts expect a modest improvement in the segment’s 2017 results, “although risks remain.” 

“The insurance industry is getting its arms around this and we should see less losses going forward,” Moody’s senior analyst Dean Ungar told BenefitsPRO. “While it’s been very hard to quantify that, the adjustments the insurers made will result in much less drag on their earnings.” 

The report focuses on the four largest insurers by membership that Moody’s rates: Anthem Inc., Centene Corp., HCSC and Molina Healthcare Inc.

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Anthem, rated Baa2 stable by Moody’s, has been committed to the exchanges, and membership levels appear to have remained stable in 2017. Anthem’s exchange enrollment of 1 million represents roughly 10 percent of total exchange enrollment, but only 3 percent of total Anthem members. Anthem also has 500,000 members with ACA-compliant products that are not in the exchanges, and an additional 300,000 individual market members with non-ACA compliant policies. 

The company has lost money in the individual market and is projecting another slight loss in 2017. In response, the company has announced that it is exiting selected markets for 2018. Overall, Anthem had pretax earnings of $4.6 billion in 2016, down 2 percent year- over-year.

“We don’t expect ACA results to have a material impact on Anthem in 2017 or beyond,” the report says.

Centene, rated Ba2 stable, has been profitable on the exchanges and has been growing its presence each year. Its exchange membership grew from 146,100 in 2015, to 537,200 in 2016 to 1.1 million as of June 30, 2017. This represents approximately 11 percent of the total exchange enrollment and 9 percent of Centene’s total enrollment. Moody’s expects that number to grow even higher next year, as the company plans to move into three new markets and expand in six existing markets, resulting in the insurer likely being the largest player on the exchanges. 

Moody’s speculates that Centene been profitable, while most others have not, in large part due to the insurer’s strategy “to start small and learn, and then grow…especially given that Centene has a solid track record of successfully managing growth.” 

Centene’s expertise in Medicaid is another factor, according to Moody’s.

“The ACA members have a lot of similarities to Medicaid members, and Centene already had appropriate networks created for this population because of its large Medicaid footprint,” the report says. “Medicaid networks also tend to have a lower cost structure than general commercial networks, and Centene has been able to leverage its lower cost structure into the ACA.” 

HCSC, rated A2 negative, has roughly 800,000 members on the exchange in 2017, which is 8 percent of the total exchange enrollment and 5.5 percent of

HCSC’s total enrollment. Moody’s placed HCSC on negative outlook in September 2016 as a result of consolidated statutory losses of $328 million and $239 million in 2014 and 2015, respectively, primarily incurred on the ACA exchanges. The company’s ACA membership peaked at roughly 1.6 million 2015 and has declined significantly in 2016 and 2017 as the company redesigned pricing and networks. 

“As a result of these changes, HCSC’s results improved significantly in 2016, with the company swinging back to positive earnings of a modest $69 million, as the losses on the exchanges narrowed,” according to the report. “In 2017, the company budgeted for the individual business to break even, but it is actually trending toward a profit, due in large part to the product and network changes implemented.” 

Molina, rated B2 negative, reported 949,000 exchange members in 2017, which is 9 percent of total exchange membership and 20 percent of its own total membership. Molina also specializes in Medicaid and has been growing its presence on the exchanges. Molina only had 15,000 members in 2014, but  increased to 205,000 in 2015, and 526,000 in 2016, before reaching its most recent level of 949,000 for 2017. 

However, unlike Centene, Molina has incurred significant losses. In the fourth quarter of 2016, Molina incurred a pretax loss of $130 million on its ACA marketplace exposure, which resulted in a $110 million pretax loss for the entire year. The loss was the result of unexpectedly high-risk transfer payments. 

“In short, the ACA attempts to remove incentives for insurers to ‘cherry-pick’ a lower risk population,” the analysts write. “Therefore, companies with a lower risk population will need to make payments to companies with a higher risk population. The volatility of the ACA risk pool has made it a challenge for some insurers, including Molina, to price products.” 

Molina’s problems in the marketplace have continued in 2017, according to Moody’s. The insurer incurred pretax charges of $44 million in the second quarter of 2017 related to risk transfer and cost sharing rebates that occurred in 2016 and also a $78 million premium deficiency reserve. In addition, based on trends observed in the second quarter of 2017, management believes results in the latter half of 2017 will fall short of previous expectations. As a result, the company announced it was pulling out of the marketplace in Utah and Wisconsin and reducing its footprint in Washington state.

“Finally, Molina is requesting premium increases of 55 percent, assuming the federal government discontinues paying cost sharing subsidies and a 30 percent increase if the CSRs continue,” the analysis says.

There are several potential developments that could undermine the individual market — namely, whether or not the federal government will continue making the cost-sharing reduction payments and whether or not it will enforce the individual mandate, according to the report. 

Based on discussions with insurers, Moody’s estimates that premiums could rise up to an additional 35 percent if the CSR payments aren’t made. 

“If the CSRs are stopped, it could re-destabilize the market, undoing some of the progress that has been done,” Ungar tells Benefits Pro. “In 2018, if the CSRs aren’t paid, certainly more insurers will exit the market, and the risk pool will be more uncertain. Who knows what will happen if premiums go up – and young, healthy people drop will drop out.” 

The risk pool could also deteriorate significantly without enforcement of the individual mandate – but Moody’s analysts do not believe individual mandate enforcement is likely to change materially. In 2015, according to the Internal Revenue Service, 12.7 million taxpayers were granted exemptions from the individual mandate, while only 6.5 million paid the mandate penalty. 

“Furthermore, until now the IRS has processed ‘silent’ returns, in which taxpayers did not indicate whether or not they had insurance, which means that many people likely avoided the individual mandate,” the analysts write. “We expect that the IRS will continue this practice.” 

Ungar adds that enforcement under the Obama administration was really not that strict because of the fear that voters would get too upset — and he expects the Trump administration would continue “in pretty much the same way.” 

“I don’t expect a big change in the levels of enforcement going forward,” he says. “The Trump administration could make it very public that they are not enforcing the mandate, pushing people out of the individual market, but I don’t expect that to happen.” 

Overall, the individual market is “getting to the point” of being manageable for insurers, while issues do remain, Ungar says. 

“This is not the best line of business to be in within the health insurance world, but it’s not the albatross that it’s been,” he says.