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2012 Commercial health insurance: Overview of financial results - PDF
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1 Commercial health insurance:, FSA, MAAA INTRODUCTION With the Patient Protection and Affordable Care Act (ACA) enactment in March, health insurers have had to comply with minimum loss ratio requirements, more stringent rate review, removal of annual benefit limits, first-dollar coverage of preventive care, and other requirements. While the largest reforms enacted by the ACA do not begin until January 1, 2014, for the individual and small group health insurance markets, there are now multiple years of insurer financial experience to evaluate how the ACA is impacting insurer s profitability and expense structure. This report uses data reported by health insurers in their Loss Reporting Forms ( forms) submitted to the Center for Consumer Information and Insurance Oversight (CCIIO) in and, along with Supplemental Health Exhibit (SHE) data, to summarize financial results in the commercial health insurance markets. 1 This report provides an overview of health insurer financial results in and evaluates changes in the health insurance industry s expense structure and profitability from to, including changes in the medical loss ratio percentage. of a high-risk population helps make the underlying morbidity of the individual risk pool lower than it would otherwise be in such states. As adjusted community rating and essential health benefit requirements become effective in the individual market beginning on January 1, 2014, the expansion of insured benefits and change in the market s health status may result in premium and claim costs more comparable to the group markets over time. FIGURE 1: AGGREGATE REPORTED COMPREHENSIVE EXPERIENCE Measure PMPM PMPM PMPM (Direct) $ $ $1.54 $ $ $0.93 $ $ $0.19 MARKETS AND FINANCIAL RESULTS OVERVIEW Figure 1 illustrates the aggregate insured lives and composite reported premium and expenses in the individual, small group, and large group health insurance markets on a per member per month (PMPM) basis and as a percentage of premium for key financial measures. istrative PMPM PMPM Loss $38.30 ($4.78) 86.0% $44.38 $ % $29.04 $ As shown in Figure 1, premium and medical expenses are approximately 33% lower in the individual market than they are in the group health insurance markets. This is primarily attributable to the individual market generally having leaner covered benefits than the small and large group markets, and potentially lower population morbidity levels. In, individual policies generally do not cover maternity costs and may have deductible levels that are substantially higher than the average employer plan. Many states also allow medical underwriting in the individual market. This may have prohibited individuals with preexisting conditions or chronic illness from entering the individual health insurance market or result in these individuals being directed to a state s high-risk pool. The absence Rebate Expense Administrative Expense 0.6% 0.3% (2.0%) 2.7% 2.2% 16.0% 12.3% 7.9% 1. Dollar values are illustrated on a per member per month basis. 2. lives equals reported member months divided by Certain values have been rounded. 4. medical loss ratio based on statutory guidelines. 1 Please see appendix for more information on these data sources.
2 Administrative expenses on a PMPM basis are higher in the individual and small group markets relative to the large group market. The difference in administrative expenses is primarily driven by differences in distribution costs (direct sales salaries and benefits, agents and broker fees and commissions) between the three markets, ranging from $8 PMPM in the large group market to $20 in the small group market. 2 Agents and broker fees in the individual market are more than 40% less than the small group market on a PMPM basis. With the introduction of the public exchanges in 2014, distribution costs in the individual and small group markets may undergo structural changes. While medical loss ratio () rebate requirements under the ACA receive significant attention on an annual basis, rebates represent well below 1% of earned premium in each market. loss ratio rebates were 0.6% of earned premium in the individual market and were only 0.3% and of earned premium for the small group and large group markets, respectively. The small and large group insurance markets in aggregate both experienced underwriting gains in. However, the aggregate results in the individual insurance market indicated an underwriting loss of nearly $5 PMPM. How have financial results changed since? With three years of insurer financial results available, initial assessments of the ACA s impact on insurer expense structure and profitability can be made. Figure 2 provides the incremental change in costs from to for insurers reporting financial results in through. For example, in the individual market, earned premium PMPM has increased nearly $19 from to. Figure 2 indicates that premium increases in the group insurance markets tracked very closely with claims expense increases. However, in the individual health insurance market, growth in claims expenses outpaced premium growth by nearly $7.50 PMPM. This is the primary reason why the medical loss ratio percentage increased by nearly 5% in the individual insurance market from to, relative to only 0.5% in the group insurance markets. While administrative expenses have decreased in each of the three markets, the decrease in the individual market was significantly larger than the group insurance markets (but still small relative to the growth in claims expenses). The decrease in administrative expenses in the individual market was primarily the result of lower expenses for agents and broker commissions. Appendix 1 of this report provides additional detail on aggregate financial results for insurers from through. Distribution of underwriting results through Figure 2 indicates that underwriting results have deteriorated in the individual market from to and remained relatively stable in the group markets. However, it is also important to understand the degree to which underwriting results vary among companies within a market. Figure 3 examines the distribution of underwriting results in these markets, separately for each calendar year. Only companies reporting experience in each of the three years are included in Figure 3. FIGURE 3: COMMERCIAL HEALTH INSURANCE - UNDERWRITING MARGIN DISTRIBUTIONS - COMPANIES REPORTING EXPERIENCE IN THROUGH 100% FIGURE 2: CHANGE IN INSURER REPORTED EXPENSES: TO INSURERS REPORTING EXPENSES IN THROUGH 90% 80% Measure 70% 60% PMPM $18.83 $18.71 $ % PMPM $26.32 $16.02 $ % istrative PMPM ($2.11) ($0.10) ($1.13) 30% PMPM ($4.42) ($0.68) Loss 4.8% 0.5% 1. Dollar values are illustrated on a per member per month basis. 2. Certain values have been rounded. 0.5% 20% 10% 0% Note: <(10%) (10%) - (5%) (5%) - (0%) 0% - 5% 5% - 10% 10%+ Distributions weighted by reported member months in each calendar year. 2 Administrative expenses will be discussed in greater detail in a separate future research report. Commercial health insurance: 2
3 In the individual market, the portion of the market experiencing underwriting gains of more than 5% decreased from 30% in to only 12% in and 14% in. While it cannot be ruled out that was abnormal relative to the years prior to the enactment of the ACA, the decrease in underwriting gains above 5% in and suggests that minimum requirements have limited exceptionally favorable underwriting results. Relative to the group insurance markets, the individual market also observed the largest proportion of market share experiencing underwriting losses, 44% in and increasing to 49% in. The portion of the small and large group markets experiencing underwriting losses in each of the three years has never exceeded 25%. As first suggested in Figure 2, underwriting results have been more stable in the group insurance markets. In each year, a significantly higher proportion of market share in the small group market experienced underwriting gains of more than 5% relative to the large group market (in, 34% versus 16%). To the extent that exchanges, whether public or private, can foster greater competition in the health insurance market, the greatest opportunity for new market entrants and compression of underwriting margins may be in the small group insurance market. CONCLUSION Insurer financial experience from the forms provides a transparent view into the United States health insurance market. Emerging health insurer financial experience from this data suggests that the individual health insurance market has experienced more significant changes in terms of profitability, claims cost, and administrative expenses relative to the group insurance markets in the years following the enactment of the ACA. As the ACA s largest market reforms in individual and small group insurance markets will be implemented on January 1, 2014, financial data from the forms provides insurers and policymakers with critical information on how the ACA is impacting market enrollment, premium, claims, administrative expenses, and insurer profitability. LIMITATIONS The analyses presented in this research paper have relied on data and other information from the forms and Supplemental Health Exhibit of health insurers. form data was obtained from the Center for Consumer Information and Insurance Oversight of the Center for Medicare and Medicaid Services at gov/cciio/resources/data-resources/mlr.html in August Supplemental Health Exhibit data was obtained using SNL Financial. The data and other information has not been audited or verified but a limited review was performed for reasonableness and consistency. If the underlying data or information is inaccurate or incomplete, the results of this analysis may likewise be inaccurate or incomplete. Published values subsequent to August 1, 2013, are not included in this report. The views expressed in this report are made by the author of this report and do not represent the collective opinions of Milliman, Inc. Other Milliman consultants may hold different views and reach different conclusions. ACKNOWLEDGEMENTS Jason Clarkson, FSA, MAAA, and Colin Gray created the database of insurer data and other information used to support the analyses in this report. Jill Herbold, FSA, MAAA, provided internal review of the database and edits. David Hayes, FSA, MAAA, peer reviewed this report. The author appreciates their assistance. QUALIFICATIONS Guidelines issued by the American Academy of Actuaries require actuaries to include their professional qualifications in all actuarial communications. The author is a member of the American Academy of Actuaries and meets the qualification standards for performing the analyses in this report., FSA, MAAA, is a principal and consulting actuary in Milliman s Indianapolis office. Contact him at or follow him on Twitter at The materials in this document represent the opinion of the authors and are not representative of the views of Milliman, Inc. Milliman does not certify the information, nor does it guarantee the accuracy and completeness of such information. Use of such information is voluntary and should not be relied upon unless an independent review of its accuracy and completeness has been performed. Materials may not be reproduced without the express consent of Milliman. Copyright 2013 Milliman, Inc. FOR MORE ON MILLIMAN S HEALTHCARE REFORM PERSPECTIVE Visit our reform library at Visit our blog at Or follow us on Twitter at Commercial health insurance: 3
4 APPENDIX 1 AGGREGATE HEALTH INSURER FINANCIAL RESULTS SUMMARY OF COMMERCIAL HEALTH INSURER FINANCIAL RESULTS CALENDAR YEAR - PER MEMBER PER MONTH PREMIUM AND EXPENSES INDIVIDUAL MARKET-ALL REPORTED COMPANIES Loss $ $ $1.54 $38.30 ($4.78) 86.0% 0.6% (2.0%) 16.0% $ $ $3.06 $38.47 ($2.55) 83.5% 1.3% (1.1%) 16.4% $ $ $40.86 ($0.67) 80.8% (0.3%) 19.1% INDIVIDUAL MARKET-COMPANIES REPORTING IN - Loss $ $ $1.57 $38.32 ($4.56) 85.4% 0.7% (2.0%) 16.5% $ $ $3.23 $38.50 ($2.67) 82.7% 1.4% (1.2%) 17.0% 9,900,000 $ $ $40.43 ($0.14) 80.6% () 19.0% SMALL GROUP MARKET-ALL REPORTED COMPANIES $ $ $0.93 $44.38 $9.81 Loss 84.5% 0.3% 2.7% 12.3% 18,800,000 $ $ $1.28 $45.68 $ % 0.4% 3.0% 12.9% 17,600,000 $ $ $0.07 $45.05 $ % 3.2% 13.1% SMALL GROUP MARKET-COMPANIES REPORTING IN - Loss 16,200,000 $ $ $0.82 $44.65 $ % 2.8% 12.3% 16,700,000 $ $ $1.22 $46.14 $ % 0.3% 3.2% 13.0% 17,200,000 $ $ $0.07 $44.75 $ % 3.1% 13.0% LARGE GROUP MARKET-ALL REPORTED COMPANIES $ $ $0.19 $29.04 $7.91 Loss 9 2.2% 7.9% 48,200,000 $ $ $0.66 $28.98 $ % 2.3% 8.1% 39,200,000 $ $ $0.00 $31.64 $ % 9.3% LARGE GROUP MARKET-COMPANIES REPORTING IN - Loss 37,400,000 $ $ $0.23 $30.40 $ % 8.4% 38,400,000 $ $ $0.81 $30.63 $ % 2.1% 8.6% 38,700,000 $ $ $0.00 $31.57 $ % 9.3% 1. equals reported member months divided by and reported premium and expenses based on form reported values as of March 31st of the following year. 3. form reported values transposed into the same format as the NAIC Supplemental Health Exhibit form. 4. equals Part 1, Line 1.1 of the Supplemental Health Exhibit. 5. equals Part 1, Line 5.0 of the Supplemental Health Exhibit. 6. equals the sum of Part 1, Lines 6.6, 8.3, and 10.5 of the Supplemental Health Exhibit. 7. equals Part 1, Line 11 of the Supplemental Health Exhibit. 8. Preleminary Loss equals sum of Part 1, Line 4 + Line Line 6.6 Line 1.8 of the Supplemental Health Exhibit. 9. as a % equals reported rebates on Part 4, Line 5.4 (Total Column) of form. 10. as a % equals reported rebates on Part 5, Line 5.4 (Total Column) of form. 11. equals. 12. equals. Commercial health insurance: 4
5 APPENDIX 2 METHODOLOGY MEDICAL LOSS RATIO DATA OVERVIEW Section 2718 of the ACA institutes minimum medical loss ratio requirements for health insurers in the individual, small group, and large group markets. The CCIIO within the Centers for Medicare and Medicaid Services (CMS) has publicly released the and Loss Reporting Data ( Data) that was used to fulfill and measure the minimum medical loss ratio requirements under PPACA. We have summarized and analyzed the Data made available through CCIIO s website ( Resources/Data-Resources/mlr.html) as of August 1, The Data contains health insurance issuer reported experience at the state and market level. Business under the medical loss ratio requirements is split between comprehensive (annual limit greater than $250,000), mini-med (annual limit at or less than $250,000), and expatriate. Data for comprehensive and mini-med business is split separately between the individual, small group, and large group markets. market values exclude limited benefit plans, dreaddisease policies, accident-only coverage, and other policies that are not considered comprehensive health insurance. The small group and large group categories exclude self-funded employers, many of which purchase stop-loss insurance. Business written through an association is included in the Data based on the insured entity s individual, small group, or large group status. For the purposes of this report, only comprehensive business has been summarized. The information contained in the data tracks closely with the Supplemental Health Exhibit (Exhibit) form that is submitted with the insurer s year-end annual statement. The Exhibit, developed by the National Association of Insurance Commissioners (NAIC), was first required in. By comparing the Exhibit and Data, health insurance industry trends can be evaluated between the three years. A limitation in these comparisons is that several Californiabased health insurers file with the state s Department of Managed Care, rather than the NAIC, and therefore, do not complete the Exhibit form. However, these companies are required to report data for the medical loss ratio calculation, and therefore, are contained in the and data set. Exhibit data was summarized using SNL Financial. Values for certain affiliate companies were combined for analyses presented in this report in a way to avoid double counting of enrollment values. Figure 4 provides a summary of the number of companies, covered lives, and aggregate premium amounts reported for calendar year on a national basis (50 U.S. states and Washington, D.C.) for comprehensive health insurance business under the ACA s Loss requirements that is included in this report. Additionally, the percentage of total premium (based on reported experience in the 50 states and Washington, D.C.) identified as noncomprehensive is illustrated. Data was reviewed for reasonableness and consistency. However, individual company results have not been audited. To the extent that individual company data was not correctly reported, the values presented in this report will not be representative of actual financial results. FIGURE 4: COMPREHENSIVE HEALTH INSURANCE REPORTED IN FORM Market Total Comprehensive Groups (Parent Companies) Companies represent reported member months divided by Certain values have been rounded. 76,200,000 ($Millions) $30,951.5 $78,475.2 $208,709.1 $318,135.8 % Non- Comprehensive 0.24% 0.00% 0.14% 0.12% If you would like further information on data and information that can be produced from the Loss Reporting Form data, please contact the author of this report. The analyses presented in this report were based upon values from the and Loss Reporting Forms and Supplemental Health Exhibit data meeting the following criteria: Health Insurance Coverage lines of business. Business in the 50 states and the District of Columbia. Identified as comprehensive health insurance coverage based upon a review of the reported values by the author of this report. For example, companies providing solely behavioral health services were flagged as non-comprehensive. Commercial health insurance: 5