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The Individual Marketplace: What we know now
One of the most important things that the passage of the Affordable Care Act in 2010 did was to create the individual market, a series of state-based insurance marketplaces (“exchanges”) where consumers could go to select and purchase health plans.
Coauthored by Dan Cruz
One of the most important things that the passage of the Affordable Care Act in 2010 did was to create the individual market, a series of state-based insurance marketplaces (“exchanges”) where consumers could go to select and purchase health plans. Prior to Obamacare, individuals who did not have access to health insurance through an employer, Medicare, or Medicaid would have to go through a broker, and that wasn’t their only barrier to getting coverage. Insurance companies frequently denied coverage to consumers with existing health conditions or offered them premiums priced too high to purchase. The ACA promised to put a stop to these discriminatory practices while at the same time creating more affordable coverage options for all.
But this dream could not be realized without the cooperation of the plans. And for a variety of reasons—including that the exchanges became a safety net for some of the country’s sickest patients and premiums were underpriced—most of the major health insurers did a quick assessment and decided they could not make a profit through Obamacare. They started pulling out of the exchanges almost immediately, threatening the very existence of the individual market.
The few insurers that stayed did in fact initially experience significant financial losses. But like every other corner of healthcare, payors have reevaluated the individual market and figured out how to make a profit. In fact, today the highest profit margins in the entire commercial health insurance space come from the exchanges.
In this article, we’ll explore how payors have managed to monetize them and what we should expect to see as industry leaders like United make their way back to the individual market.
By the Numbers: The Individual Market
The overarching takeaway of the individual market today is how adaptive payors have become since Obamacare, learning to spin a profit after an initial loss. Contrary to the fears in 2017, the individual market stabilized over 2018 and 2019, and the concerns built into the premiums never came to fruition, resulting in high-priced premiums and very profitable margins for the plans.
As a result, the individual market is currently in a “high profitability” stage of the typical health plan underwriting cycle. In 2017, the combined individual market had an estimated loss of $3.4 billion. By 2019, the combined individual market had an estimated gain of $4.6 billion, an over $8 billion swing in profitability in two years.
Exhibit 1: Individual Market Financial Results 2017 and 2019 (PI-squared Output)
| Financial Item | Individual Market 2017 | Individual Market 2019 | Change from 2017 to 2019 |
|---|---|---|---|
| Number of Covered Lives | 1,4198,476 | 1,2757,119 | (1,441,356) |
| Earned Premiums | $80,977,550,324 | $89,700,517,015 | $8,722,966,691 |
| Incurred Claims net of Risk Adjustment | $71,212,389,718 | $68,958,424,323 | $(2,253,965,395) |
| Estimated MLR Rebates Incurred | $113,162,696 | $2,187,334,604 | $2,074,171,908 |
| Federal and State Taxes | $3,857,951,686 | $4,992,929,048 | $1,134,977,363 |
| Health Care Quality Improvement Expenses | $789,062,995 | $779,918,080 | $(9,144,915) |
| Non-Claim Expenses | $8,445,966,398 | $8,149,567,789 | $(296,398,609) |
| Estimated Gross Gain/Loss (Before MLR Rebates) | $(3,327,820,474) | $6,819,677,775 | 410,147,498,249 |
| Estimated Net Gain/Loss (After MLR Rebates) | $(3,440,983,170) | $4,632,343,171 | $8,073,326,341 |
In addition, the major health plans participating in the group and individual markets (see Exhibits 2 and 3) experienced a 6.9% profit margin in the individual market in 2019 vs. a 3.2% margin in the group market. This equates to $510 per enrollee per year in the individual market compared to $186 per enrollee per year for group market.
Exhibit 2: Major Health Plans Group Market Financial Results (PI-squared Output)
| Company | Group Market Lives | Group Market Premiums | Group Market Estimated Net Profits | Group Market Estimated Net Profits % of Premium | Group Market Estimated Net Profits Per Enrollee |
|---|---|---|---|---|---|
| KAISER FOUNDATION GRP | 8,305,228 | $47,339,569,348 | $1,546,219,897 | 3.3% | $186 |
| Wellpoint Inc Grp | 5,368,577 | $33,600,926,387 | $1,727,043,395 | 5.1% | $322 |
| HCSC GRP | 4,045,105 | $23,288,342,011 | $338,333,813 | 1.5% | $84 |
| Cigna Hlth Grp | 1,925,770 | $11,203,841,018 | $194,078,072 | 1.7% | $101 |
| Blue Shield of California Group | 1,773,387 | $8,391,085,173 | $176,403,952 | 2.1% | $99 |
| Blue Cross and Blue Shield of Florida, Inc. | 1,195,264 | $7,526,878,226 | $215,244,793 | 2.9% | $180 |
| Total of Above | 22,613,331 | $131,350,642,163 | $4,197,323,924 | 3.2% | $186 |
Exhibit 3: Major Health Plans Individual Market Financial Results (PI-squared Output)
| Company | Individual Market Lives | Individual Market Premiums | Individual Market Estimated Net Profits | Individual Market Estimated Net Profits % of Premium | Individual Market Estimated Net Profits Per Enrollee |
|---|---|---|---|---|---|
| KAISER FOUNDATION GRP | 1,031,502 | $7,028,928,689 | $326,964,133 | 4.7% | $316 |
| Wellpoint Inc Grp | 686,249 | $5,428,789,718 | $590,145,438 | 10.9% | $859 |
| HCSC GRP | 846,928 | $6,417,274,569 | $124,166,276 | 1.9% | $146 |
| Cigna Hlth Grp | 265,402 | $1,968,337,269 | $114,255,921 | 5.8% | $430 |
| Blue Shield of California Group | 727,067 | $5,584,625,335 | $594,684,484 | 10.6% | $817 |
| Blue Cross and Blue Shield of Florida, Inc. | 1,139,004 | $8,533,046,610 | $644,706,962 | 7.6% | $566 |
| Total of Above | 4,696,152 | $34,961,002,190 | $2,394,923,216 | 6.9% | $509 |
As shown, while insurers did struggle and suffer loss, they were able to master the system to better monetize. How exactly? Their learnings of these five key items helped them make the marketplace profitable:
- For starters, the individual market is generally insulated from the negative impacts of overpriced premiums and high premium rate increases—because the consumer never gets hit in the process. Rather, the government pays — 87% of the individual market exchange enrollees receive premium subsidies. These subsidies are based on the cost of the second lowest-cost silver plan in the market, which means that when premiums rise, subsidies also rise, and in many cases, net premiums (premiums after subsidies, or what the consumer pays) decrease. The large premium increases in 2018 and 2019 did not collapse the individual market because most consumers did not feel the impact, and many experienced net premium decreases.
- In previous years, insurance companies disproportionately raised the premiums for Gold and Platinum plans where there is more insurance risk due to lower copayments and deductibles. This change in the premiums for the high metal plans was designed to incentivize consumers to select the more affordable Bronze plans, thus transferring financial risk to the providers responsible for collecting the higher out-of-pocket costs.
- The Biden administration has increased subsidies even further and expanded them beyond the prior limit of 400% of the federal poverty level. This should increase the size of the market and may lead to a slow dissolution of the small group market as small employers recognize the opportunities for savings for their employees in the individual market.
- Despite the improved market affordability, recent reports suggest that health plans are targeting profitable enrollment through misaligned premiums. This misalignment has led to a shift to higher cost-sharing plans (Bronze metal level) for low-income consumers, likely reducing medical care utilization and increasing “insured-bad debt” for providers. That is, all or much of the lower cost Bronze plan’s premium is covered by the subsidy, leaving the consumer with exceedingly high out-of-pocket copayments and deductibles.
- Regulators have been slow to respond to the need to realign the metal premiums back to actuarially appropriate levels. This allows for greater profitability for health plans while increasing both consumers’ out-of-pocket costs and providers’ bad debt.
What hospitals and providers should know—and why they should take action
There are many lessons that have been learned in this process that will be a part of health plan thinking in the future for both hospitals and providers. The top facts to point out:
- The large increases in premiums in the individual market were mainly predicated on bad experience from underpricing in 2014-2017 and market outlook fears that did not materialize. We also discovered that medical claims were not the main driver for the high premium increases.
- Those providers that gave health plans deep discounts for the individual market to support their ability to offer a “viable” product in a market are stuck with below-market rates while the health plans make windfall profits.
- Since medical claims in the individual market are significantly below premium rates for almost all payers, health plans have little basis for asking for rate reductions from providers to cover medical costs.
- Modest increases in provider rates will impact the payer’s windfall profits but should not affect net premiums in the individual market.
Providers need to advocate for regulations requiring realignment of the metal premiums (e.g., making Gold and Platinum more affordable), so they do not continue to shoulder a disproportionate share of the actuarial risk through unpaid out-of-pocket costs.
Why isn’t more action being taken to monitor these gains? For hospitals and providers to fight back, there’s one major factor that can help push forward the necessary steps: data. The numbers shared within this article were pulled from a new tool, called PI-squared, designed to help give providers a better understanding of their state’s payer markets. The PI-squared database provides customized data specific to geography, time frame, demographics, and more. This tool enables hospitals and providers to level the playing field in negotiations and help providers bridge an information gap between themselves and health plans. Learn more about PI-squared.