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

|

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

|

“The insurance industry is getting its arms around this and weshould see less losses going forward,” Moody’s senior analyst DeanUngar told BenefitsPRO. “While it’s been very hard to quantifythat, the adjustments the insurers made will result in much lessdrag on their earnings.”

|

The report focuses on the four largest insurers by membershipthat Moody’s rates: Anthem Inc., Centene Corp., HCSC and MolinaHealthcare Inc.

|

Related: Anthem,Cigna, Macy’s sued by DOL over wellness plan

|

Anthem, rated Baa2 stable by Moody’s, has been committed to theexchanges, and membership levels appear to have remained stable in2017. Anthem's exchange enrollment of 1 million represents roughly10 percent of total exchange enrollment, but only 3 percent oftotal Anthem members. Anthem also has 500,000 members withACA-compliant products that are not in the exchanges, and anadditional 300,000 individual market members with non-ACAcompliant policies.

|

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

|

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

|

Centene, rated Ba2 stable, has been profitableon the exchanges and has been growing its presence each year. Itsexchange membership grew from 146,100 in 2015, to 537,200 in 2016to 1.1 million as of June 30, 2017. This represents approximately11 percent of the total exchange enrollment and 9 percent ofCentene's total enrollment. Moody’s expects that number to groweven higher next year, as the company plans to move into three newmarkets and expand in six existing markets, resulting in theinsurer likely being the largest player on the exchanges.

|

Moody’s speculates that Centene been profitable, while mostothers have not, in large part due to the insurer’s strategy “tostart small and learn, and then grow…especially given that Centenehas a solid track record of successfully managinggrowth.”

|

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

|

“The ACA members have a lot of similarities to Medicaid members,and Centene already had appropriate networks created for thispopulation because of its large Medicaid footprint,” the reportsays. “Medicaid networks also tend to have a lower cost structurethan general commercial networks, and Centene has been able toleverage its lower cost structure into the ACA.”

|

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

|

HCSC’s total enrollment. Moody’s placed HCSC on negative outlookin 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 ACAmembership peaked at roughly 1.6 million 2015 and has declinedsignificantly in 2016 and 2017 as the company redesigned pricingand networks.

|

“As a result of these changes, HCSC's results improvedsignificantly in 2016, with the company swinging back to positiveearnings of a modest $69 million, as the losses on the exchangesnarrowed,” according to the report. “In 2017, the company budgetedfor the individual business to break even, but it is actuallytrending toward a profit, due in large part to the product andnetwork changes implemented.”

|

Molina, rated B2 negative, reported 949,000 exchange members in2017, which is 9 percent of total exchange membership and 20percent of its own total membership. Molina also specializes in Medicaid and hasbeen growing its presence on the exchanges. Molina only had 15,000members in 2014, but increased to 205,000 in 2015, and526,000 in 2016, before reaching its most recent level of 949,000for 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 theresult 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 tomake payments to companies with a higher risk population. Thevolatility of the ACA risk pool has made it a challenge for someinsurers, 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 $44million in the second quarter of 2017 related to risk transfer andcost sharing rebates that occurred in 2016 and also a $78 millionpremium deficiency reserve. In addition, based on trends observedin the second quarter of 2017, management believes results in thelatter half of 2017 will fall short of previous expectations. As aresult, the company announced it was pulling out of the marketplacein Utah and Wisconsin and reducing its footprint in Washingtonstate.

|

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

|

There are several potential developments that could underminethe individual market — namely, whether or not the federalgovernment will continue making the cost-sharing reduction paymentsand whether or not it will enforce the individual mandate,according to the report.

|

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

|

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

|

The risk pool could also deteriorate significantly withoutenforcement of the individual mandate – but Moody’s analysts do notbelieve individual mandate enforcement is likely to changematerially. In 2015, according to the Internal Revenue Service,12.7 million taxpayers were granted exemptions from the individualmandate, 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 hadinsurance, which means that many people likely avoided the individual mandate,” the analysts write. “Weexpect that the IRS will continue this practice.”

|

Ungar adds that enforcement under the Obama administration wasreally not that strict because of the fear that voters would gettoo 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 goingforward,” he says. “The Trump administration could make it verypublic that they are not enforcing the mandate, pushing people outof the individual market, but I don’t expect that tohappen.”

|

Overall, the individual market is “getting to the point” ofbeing manageable for insurers, while issues do remain, Ungarsays.

|

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

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Katie Kuehner-Hebert

Katie Kuehner-Hebert is a freelance writer based in Running Springs, Calif. She has more than three decades of journalism experience, with particular expertise in employee benefits and other human resource topics.