Before CSR Cuts, ACA Health Plans Expected Stable Premiums

October 30, 2017 - Had cost-sharing reductions (CSRs) under the Affordable Care Act remained in place payers would only expect modest premium increases with some continued profitability, a USC Brookings report found.

However, the uncertainty resulting from federal waffling over the continuation of the CSRs, as well as legislative efforts to repeal the ACA, have called the stability of the health insurance market into question.

Based on year-to-year financial performance of payers operating in nationwide insurance markets, the report estimates that payers were only expected to lose 0.4 percent on ACA premium revenues before the removal of the CSRs.

This figure may actually underestimate the potential for payer profitability, researchers noted.

“There is reason to believe that the data used in this analysis may systematically understate insurers’ actual financial performance, suggesting that insurers were, in fact, on track to make modest profits on ACA-compliant policies in 2017, on average nationwide,” the report says.

In a stable policy environment with the CSRs in place, payers would have been able to offset premium growth for ACA plans from the current 20.5 percent to a slower growth rate of 6.9 percent.

Claims spending was projected to account for 86 percent of earned premium revenues in 2017, which would have required an increase in premiums of 4.3 percent.

Administrative spending on ACA health plans required around 11 percent of premium revenue in 2017, and offsetting these costs in a stable policy environment would require an additional 0.2 percentage point increase in per member per month premiums.

The return on the ACA’s health insurance fee, together with increases in federal income tax liability and smaller changes in other fees, would have required an additional 2.4 percentage point premium increase for 2018.

Uncertainty around federal policy helped explain why payers experienced losses on ACA compliant plans from 2014 to 2017, the report added.
In 2014, payers incurred losses of 5.7 percent of premium revenue on ACA plans because of limited information available about the individual market risk pool, leading payers to underprice premiums in the earlier years of the individual market.

On average, payers continued to experience financial losses on ACA compliant plans from 2015 to 2016 because of small, steady premium increases that weren’t enough to create revenue. These losses equated to 11-12 percent of premium revenue during this time period.

Per member per month claims spending in ACA plans only grew by 3.2 percent in 2015 and 1.5 percent in 2016, suggesting that a high volume of claims growth was not the primary reason that payers could not financially profit from ACA plans. The team suggested that this reflected a stable or improving patient mix within ACA risk pools during these two years.

The implementation of the ACA’s reinsurance program helped pay for a portion of payer costs for high-cost enrollees from 2014 through 2016, but the federal government has lowered those payments over time. The reinsurance program helped remove 8.2 percent of per member per month premium revenue in 2015, and 6.9 percent in 2016.

By 2017 payer premium increases on ACA plans were more than sufficient to offset slow claims growth, and the phasing out of the reinsurance program, leading payers to experience improved profit margins on their plans.

By raising premiums to 20.5 percent in 2017, payers would have offset the costs created by a low volume of personal claims and the high expenses typically covered under the reinsurance program.

As the CSRs and policy remain unstable, payers have to look towards other market offerings and health plan benefits that decrease needed premium growth to provide ACA compliant plans.

The team suggested that stakeholders can use the findings within the report to further research how financial implications of ACA plans could have related to overarching policy implications throughout the last four years.

“A fully satisfying account of why insurers incurred significant losses in 2014 and, particularly, why those losses persisted through 2016 remains elusive,” the team concluded. “Better understanding of what made the transition to the new institutional environment created by the ACA challenging may help policymakers manage future policy transitions more effectively.”