Commercial health plan financial trends: 2011-2016
Commercial group and individual lines of business trends
How have market and policy changes challenged commercial health plans? The final report in our health plan financial trends series explores five trends for commercial lines of business.
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Commercial health plan performance: Five key findings
Commercial lines of business, particularly the group segment, used to be growth and profitability engines for many health plans. However, market and policy changes have posed significant challenges. And many health plans have struggled financially, particularly in the rapidly evolving commercial individual market.
This report, the third and final installment in our health plan financial trends series, outlines five key findings from our analyses of the financial performance of commercial health plans:
- The fully insured risk pools in both commercial lines of business—group and individual—deteriorated in 2014 and, to a somewhat lesser extent, in 2015. Between 2013 and 2014, breakeven premiums per member increased by 45 percent for the commercial individual segment and by 10 percent for the commercial group segment, likely indicating an increase in the insured population's average risk, as well as benefit design changes within these segments. By 2016, however, premium costs for both commercial risk pools increased at more moderate levels.
- In the fully insured commercial group segment, aggregate revenue was stable between 2011 and 2016, but profitability declined in 2014 and remained lower than pre-2014 levels in 2016. Aggregate underwriting gains remained relatively constant between 2011 and 2013 but declined by 35 percent in 2014—from $7.8 billion in 2013 to $5.1 billion in 2014. Although underwriting gains increased somewhat in 2015 and 2016, they remained lower than their pre-2014 levels.
- Commercial individual business in aggregate has not been profitable since 2012, with mounting losses after 2014. Unlike other lines of business, this was true irrespective of plan size. Between 2013 and 2014, aggregate commercial individual business underwriting losses increased by more than 400 percent—from -$1 billion in 2013 to -$4.2 billion in 2014. By 2016, aggregate underwriting losses more than doubled compared to 2014 (-$10.3 billion). In contrast to our findings in other lines of business—where the largest health plans accounted for a disproportionate share of aggregate underwriting gains—the largest three plans by commercial individual revenue incurred losses. The combined underwriting losses for these plans totaled more than $2 billion in both 2015 and 2016.
- Of the three premium stabilization programs—reinsurance, risk adjustment, and risk corridors (known as the 3Rs)—reinsurance was the most effective at helping contain health plan losses. Reinsurance payouts improved aggregate underwriting margins by 12 percentage points in 2014—as the program phased out over the next two years, reinsurance payouts declined. The risk corridor program's intended protective impact was largely blunted due to lower-than-expected payouts; for instance, health plans received zero payouts for their 2016 claims. If health plans' risk corridor claims had been paid in full, the payouts would have improved plans' aggregate underwriting margins by four percentage points in 2016.
- Although the risk adjustment program was in aggregate neutral, it had large distributional consequences. Between 2014 and 2016, the flow of aggregate payments under the risk adjustment program was generally from smaller plans with less market experience and information to larger, more experienced plans. The largest plans in the commercial individual segment, including Blue Cross Blue Shield plans, received an increasingly higher share of their premiums as risk adjustment receipts. By contrast, smaller plans (PSPs), paid a disproportionately larger share of risk adjustment payouts as a percentage of their premiums.
A changing market
The results of our analysis underscore the importance of policy and its appropriate implementation as drivers of health plans' performance in the commercial segments of the fully insured market. These segments—the individual market, in particular—were significantly changed by the Affordable Care Act (ACA).
In addition, some policy changes were not implemented as originally intended, including partial or no stabilizing market mechanisms and regulations, which likely resulted in unintended consequences for health plans. Many of this study's findings can be categorized as pre- and post-2014 results, which reflect the direct and indirect impacts of policy changes and uncertainty on commercial health plans.
Health plans of all sizes should continuously re-evaluate their position and capabilities in a changing market. High market exit rates and member turnover can lead to instability in health plans' risk profiles, making accurate pricing and predictability challenging. Price setting in an unstable market requires sophisticated premium rate-setting capabilities, including predictive data analytics, and increased flexibility to rapidly respond to health care expense increases in specific areas.
To learn more about commercial health plan financial trends, download the full report.
Health plans of all sizes should continuously re-evaluate their position and capabilities in a changing market.