With Medicare, ACA Enrollment Upon Us, Here’s How Health Insurers (and Their Customers) are Faring

It’s that scary and uncertain time of the year again. No, not Halloween; Health insurance season! Medicare Open Enrollment started on October 15 and ends on December 7, while open enrollment under the Affordable Care Act (ACA) started yesterday and ends on December 15.

During this time, all eligible Americans can get health insurance for 2018. For those seeking coverage under the ACA, you have to sign up during the open enrollment period or you won’t be able to until same period next year. The only exception is if you experience a qualifying event, such as a job loss, move, marriage or divorce, loss of your spouse, aging off a parent’s plan, or birth of a baby.

Unfortunately, a lot is up in the air right now. Thanks to the recent halt to health insurer subsidies, your options might be more limited and more expensive than before.

First, let me explain how subsidies under the Affordable Care Act were supposed to make health insurance more affordable. There are two subsidies: One for the insured, which governed the price paid by an individual, and another for the insurers to subsidize the expected additional cost of sicker enrollees.

Following a legal policy decision by the current administration, insurers will likely pass on the additional cost of lost subsidies via higher premiums. This may lead to a further reduction in plan availability under the ACA.

So that’s the situation from a consumer perspective. But what about the business angle? How are health insurers doing overall and should we be worried about their financial health? Our latest safety ratings on over 690 health companies suggest that the industry is stable, though not quite as strong as it used to be.

Take a look at the recommended insurer trend below. Three years ago, 17.4% of the industry was rated “B+” or higher. That percentage was down to 11.4% as of Q2 2017. At the same time, the worst of the deterioration appeared to end in 2016.

But there are still 26.9% of rated companies in the “D” and “E” range, which we consider to be “weak” and “very weak”, respectively. This is up from three years ago, when 20% of health insurers received the lowest ratings.

So that’s what our ratings show. Now, let’s take a look at the latest insurer filings and see what’s going on with their premiums and profitability.

Based on Q2 2017 filings, the average monthly premium has risen 4.6% from a year ago. Over the last five years, average premiums have risen 20.1%, from $212.13 in Q2 2012 to $254.78 in Q2 2017.

Keep in mind, these are average figures. Insurance costs for some individuals in different areas of the country could be significantly higher.

Although premiums are going up, profitability doesn’t appear to be following suit. This is mainly because of the Medical Loss Ratio (MLR), a rule under the ACA that applies to all health insurers requiring them to spend at least 80-85% of collected premiums on providing health services to their enrollees. In other words, the profit margin isn’t going to exceed 15-20% explaining a fairly steady line in the graph below. All other business expenses still need to be accounted for from this percentage.

Because of the ACA requirements, the average health insurer’s profit margin hasn’t changed significantly over the last five years, ranging from a high of 14.5% in Q3 2012 to a low of 11.7% in Q1 2016.

*12-month rolling average

In addition to the premium data and profitability, our analysis also shows an increase in doctor office visits. On average, Q2 2017 doctor visits rose 4% year-over-year, with 126.5 doctor visits per hundred people during the quarter. That makes sense because customers beset by higher costs and the potential of lost coverage are taking advantage of their insurance while they still can.

Bottom line: While the effects of recent healthcare developments in Washington won’t be fully apparent until we get year-end filings, we’re already seeing some impact. We would expect to see a decline in insurer profitability because they will have to eat up more of the cost for providing health coverage. And we could see a further increase in premiums, as more companies withdraw from the health insurance marketplace.

Regardless of what happens, be sure to follow your health insurer on the Weiss Ratings website.

Think Safety,

Gavin Magor

Insurance Insights Edition, By Gavin Magor, Senior Financial Analyst Gavin has more than 30 years of international experience in credit-risk management, commercial lending and insurance, banking and stock analysis and holds an MBA. Gavin oversees the Weiss ratings process, developing the methodology for Weiss’ Sovereign Debt and Global Bank Ratings. Gavin has appeared on both radio and television, including ABC and NBC as an expert in insurance, bank and stock ratings and has been quoted by CNBC, The New York Times, Los Angeles Times, and Reuters as well as several regional newspapers and trade media.