The Council of Economic Advisers

March 2018

September 29, 2017

The Profitability of Health 

Insurance Companies
CEA • The Profitability of Health Insurance Companies 1

Executive Summary

March 2018

Despite significant initial financial losses in the individual market after the key provisions of the 

Affordable Care Act (ACA) took effect, health insurer profitability in the individual market has 

risen due to substantial premium increases, government premium tax credits that pay for 

those premium increases, and the large, government-funded, Medicaid expansion. Since ACA 

implementation on January 1, 2014, health insurance stocks outperformed the S&P 500 by 106 

percent. Insurers remaining in the individual and small group markets seem to have recently

accounted for ACA regulations and an older, more costly risk pool than they expected by 

charging higher premiums that have largely been covered by federal government premium 

subsidies. Stable year-over-year enrollment, despite large premium increases suggests a 

distorted market that involves large transfers from taxpayers to insurers. Large insurers, many 

of whom left the individual market, are profiting from the Medicaid expansion, which is largely 

provided through private managed care and paid for by the federal government. All health 

insurers can expect to become more profitable this coming year due to the recent tax reform.
CEA • The Profitability of Health Insurance Companies 2

The Affordable Care Act (ACA) created new opportunities for insurance companies by 

subsidizing the purchase of health insurance and expanding eligibility for subsidies. In the 

individual and small group market, the ACA provided subsidies to lower the cost of premiums 

for lower income people who purchase insurance on the newly created health insurance 

exchanges. About 6 percent of Americans obtain health insurance in the individual and small 

group market and about half of them buy policies on the exchanges. Approximately 85 percent 

of exchange purchasers receive a premium subsidy (ASPE 2017). These subsidies are computed 

so that enrollees do not pay more than a prescribed portion of their income for a common plan, 

thereby ensuring that insurance companies receive subsidies regardless of how high the 

premiums go and reducing incentives for price competition as taxpayers fund almost all of the 

higher premiums.

Many lower-income, able-bodied, working-age adults gained Medicaid coverage after the ACA 

Medicaid expansion. Coverage was primarily provided through contracts with private 

managed care organizations (CMS 2016; KFF 2017a). From 2014 to 2016, the federal 

government paid for all of the premiums for Medicaid expansion enrollees and this year pays 

for 94 percent of the premiums. Spending per newly eligible Medicaid enrollee was higher than 

projected by the Congressional Budget Office (CBO 2017). Average costs for expansion adults 

were 28 percent higher than costs for non-newly eligible adults in 2015 (CMS 2016). 

After an initial adjustment period, insurers’ financial health, as measured by their stock prices, 

surpassed earlier levels. As shown in Figure 1, prior to ACA implementation, health insurers’

stock values moved with the S&P 500 index, but after implementation, they diverged 

significantly. As government policy amplified eligibility and per-enrollee spending, the stock 

prices of health insurance companies rose by 272 percent from January 2014 to 2018 resulting 

in improved profitability and outperforming the S&P 500 by 106 percent (Figure 1).

Health insurance companies initially struggled to make a profit in the post-ACA individual and 

small group markets. Insurers were unsure how to price insurance with the new ACA 

requirements such as, guaranteed-issue, modified community rating, and an expansive 

minimum essential benefits requirement. They underpriced their products relative to their 

enrollees’ health risks. Many insurers left the market altogether. But the remaining insurers, 

despite the expiration over a year ago (2016) of the reinsurance and risk corridors programs 

which were meant to financially protect insurers, have started to make higher profits again 

(McCue & Hall 2017). Figure 2 shows that, after narrowing in the initial years of ACA 

implementation, the gap between individual market premiums and claims payments was 

much higher in 2017 than pre-ACA. As of 2017, most Blue Cross Blue Shield regional insurers, 

the main insurers left in the ACA-compliant individual and small group markets, have better 

profit margins than during the initial years of offering plans in marketplaces and have returned 

to pre-ACA profitability (Farrah 2018). 
CEA • The Profitability of Health Insurance Companies 3

0

1

2

3

4

5

6

Jan2005Jan2006Jan2007Jan2008Jan2009Jan2010Jan2011Jan2012Jan2013Jan2014Jan2015Jan2016Jan2017

Figure 1: Health Insurance Stock Index vs. Benchmarks

Index levels, Jan-2005 = 1 

Jan2018

Health insurers 

(value weighted)

SP 500 ETF

Insurance sector ETF

Healthcare 

sector ETF

ACA became law ACA implementation

Source: Compustat.

0

100

200

300

400

500

2011 2012 2013 2014 2015 2016 2017

Figure 2: Individual Market Monthly Premiums and Claims Per Enrollee

Nominal Dollars

Source: Kaiser Family Foundation; Mark Farrah Associates.

Note: Each year consists of average third quarter data from Jan 1 to Sept 30. 

Premiums

Claims
CEA • The Profitability of Health Insurance Companies 4

Gross profit margins (premiums less claims) have increased as the small number of remaining 

companies gained experience with the individual and small group market risk pool and set 

higher premiums while government subsidies cover most of the rising insurance costs on the 

exchanges. The fact that low-income individuals are enrolling at high rates, while at the same 

time premiums are rising dramatically, is a clear sign of a distorted market that involves larger 

transfers from taxpayers to insurers (KFF 2017b).

Overall, while many of the largest U.S. health insurers left the individual market because of 

losses in the state and federal marketplaces, they had increased revenues in the Medicare and 

Medicaid markets (Schoen and Collins 2017). Medicaid enrollment more than doubled among 

the largest insurers (Schoen and Collins 2017) as spending soared. Net profit margins at many

large health insurance companies have returned to pre-ACA levels. In addition, some of the 

largest health insurers expect earnings (net income) to increase by 8.7 to 19.6 percent in 2018 

from 2017, with a significant portion of the increase due to tax reform (UnitedHealth Group, 

Inc. 2018; Humana, Inc. 2018).

Conclusion

Despite an initial rough patch in the ACA marketplaces, the ACA Medicaid coverage expansion 

and subsidies to insurers have resulted in a large increase in health insurer profits. Health 

insurers’ stock prices more than doubled the impressive gain in the S&P 500 since the law’s 

main provisions took effect on January 1, 2014. Much of insurers’ increased profitability has 

resulted from increased Medicaid enrollment and increased payments per enrollee in Medicaid 

expansion states where the federal government pays nearly all the costs. While insurers initially 

incurred losses in the ACA marketplaces as they adjusted to new regulations and a relatively 

unhealthy risk pool, insurers are now profiting on the individual market as well, with higher 

premiums that are largely covered by federal premium subsidies.
CEA • The Profitability of Health Insurance Companies 5

References

ASPE (Assistant Secretary for Planning and Evaluation). 2017. “Health Plan Choice and 

Premiums in the 2018 Federal Health Insurance Exchange.” 

https://aspe.hhs.gov/system/files/pdf/258456/Landscape_Master2018_1.pdf.

CBO (U.S. Congressional Budget Office). 2017. “CBO’s Record of Projecting Subsidies for 

Health Insurance Under the Affordable Care Act: 2014 to 2016.” 

https://www.cbo.gov/publication/53094.

CMS (Centers for Medicare and Medicaid Services, Office of the Actuary). 2016. “2016 

Actuarial Report on the Financial Outlook for Medicaid.” 

https://www.cms.gov/Research-Statistics-Data-andSystems/Research/ActuarialStudies/Downloads/MedicaidReport2016.pdf

Cox, C., A. Semanskee, and L. Levitt. 2018. “Individual Insurance Market Performance in Late 

2017.” Kaiser Family Foundation. https://www.kff.org/health-reform/issuebrief/individual-insurance-market-performance-in-late-2017/.

Farrah Associates. 2018. Improved Profit Margins for Leading Blue Cross & Blue Shield Plans in 

Third Quarter 2017. http://www.markfarrah.com/healthcare-businessstrategy/Improved-Profit-Margins-for-Leading-Blue-Cross-and-Blue-Shield-Plans-inThird-Quarter-2017.aspx

Humana, Inc. 2018. “Humana Reports Fourth Quarter 2017 Financial Results; Provides 2018 

Financial Guidance.” http://press.humana.com/press-release/humana-reports-fourthquarter-2017-financial-results-provides-2018-financial-guidance

KFF (Kaiser Family Foundation). 2017. “Share of Medicaid Population Covered Under Different 

Delivery Systems.” https://www.kff.org/medicaid/state-indicator/share-of-medicaidpopulation-covered-under-different-deliverysystems/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22s

ort%22:%22asc%22%7D

——— 2017b. “Key Facts About the Uninsured Population.” 

https://www.kff.org/uninsured/fact-sheet/key-facts-about-the-uninsured-population/

McCue, M. J. and M. A. Hall. 2017. “How Have Health Insurers Performed Financially Under the 

ACA’s Market Rules?” The Commonwealth Fund Issue Brief. 

http://www.commonwealthfund.org/~/media/files/publications/issuebrief/2017/oct/mccue_how_have_hlt_insurers_performed_financially_aca_market_ib

.pdf
CEA • The Profitability of Health Insurance Companies 6

Schoen, C. and S. R. Collins. 2017. "The Big Five Health Insurers’ Membership And Revenue 

Trends: Implications For Public Policy." Health Affairs 36, no. 12: 2185-2194.

UnitedHealth Group, Inc. 2018. “Form 10-K 2017.” Retrieved from SEC EDGAR 

https://www.last10k.com/sec-filings/unh/0000731766-18-000005.htm
ABOUT THE COUNCIL OF ECONOMIC ADVISERS

The Council of Economic Advisers, an agency within the Executive Office of 

the President, is charged with offering the President objective economic 

advice on the formulation of both domestic and international economic 

policy. The Council bases its recommendations and analysis on economic 

research and empirical evidence, using the best data available to support 

the President in setting our nation's economic policy.

www.whitehouse.gov/cea 

March 2018