Overall insurer losses may have doubled last year compared to 2014 on individual policies sold via the Patient Protection and Affordable Care Act exchanges.
An early review of insurance company data by McKinsey & Co. indicates that total losses and margins worsened considerably in 2015. Insurance companies have complained that "gaming" the exchange system accelerated last year, with many more sick individuals signing up for policies in the extended PPACA enrollment periods. The McKinsey study seems to bear out those allegations.
"Our initial perspective, based on emerging financial results reported for 2015, is that aggregate losses in the individual market may have more than doubled from 2014," McKinsey wrote in its report, "Exchanges three years in: Market variations and factors affecting performance."
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While the study was based on incomplete data, the results of crunching the sample-size data was alarming.
In 2014, McKinsey said, insurers lost money to the tune of $2.7 billion, posting a -5 percent post-tax margin. In 2015, margins plummeted, to between -9 percent and -12 percent.
"The larger losses are most likely the result of two primary factors: higher year-over-year medical loss ratios (MLRs) (around 4.5 percent to 5 percent margin reduction) and lower reinsurance payments (another 3.5 percent to 4 percent margin reduction)," McKinsey said. "The majority (around 60 percent) of carriers that filed financial results publicly reported a higher MLR in 2015 than in 2014."
As happened in 2014, not everyone lost money. With the administration and Congress both addressing the enrollment loophole cited by insurers as the worst culprit, exchange sales may prove more attractive.
McKinsey observed that exchange insurers as a whole should learn from those that have been profitable, and adjust their models accordingly.
"There are specific actions carriers can take to improve near-term performance on the public exchanges and position their businesses for longer-term sustainability," McKinsey advised. "To succeed, however, many carriers may have to develop a fundamentally different business model—the commercial segment model is not viable for the public exchanges. Carriers will also have to remain nimble to adjust rapidly to the market's evolution."
In any case, McKinsey says as long as the federal premium subsidy system remains in place, the system won't crash.
"The individual market has little risk of entering a classic insurance 'death spiral' as long as the federal government continues to offer subsidies to those with incomes below 400 percent of the federal poverty level. Given the unique regulatory conditions of this market, the key determinants of its stability are not the traditional factors (risk and cost of care for this segment), but rather the ongoing subsidy payments."
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Dan Cook
Dan Cook is a journalist and communications consultant based in Portland, OR. During his journalism career he has been a reporter and editor for a variety of media companies, including American Lawyer Media, BusinessWeek, Newhouse Newspapers, Knight-Ridder, Time Inc., and Reuters. He specializes in health care and insurance related coverage for BenefitsPRO.
