Over a third of the total sample (53 insurers, groups 1 and 2) were profitable in 2014; these insurers accounted for 41 percent of the total members in this sample (data not shown). The remainder were either unprofitable both years or moved from profit to loss. Medical claims, rather than administrative costs, were the main driver of the negative financial experiences.
Most of insurers’ underestimated claims in 2014 were offset by $7.9 billion in reinsurance payments for high-cost patients from the federal government. The reinsurance program helps insurers transition to the new market rules, using federal funds collected through an earmarked fee on all health insurance, included self-funded plans, to pay a large portion of high-cost claims incurred in the individual market.
Insurers that turned profitable in 2014 (group 1) saw their medical costs decrease by almost 12 percentage points as a percentage of premium—that is, their MLR decreased. Coupled with a 1.4 point decline in the mean administrative cost ratio, these changes resulted in a substantial (13.2-point) rise in their overall profit margin to 7.6 percent, from a loss of 5.6 percent. In contrast, insurers that reported losses (groups 3 and 4) had substantially higher mean MLRs. Although they managed to reduce their administrative costs significantly, their MLR increased even more, producing a mean loss greater than 10 percent.
By subsidizing coverage, establishing insurance exchanges, and making insurance available to people with preexisting conditions, the ACA’s reforms changed market conditions in ways that insurers had difficulty predicting, at least initially. In 2014, the ACA’s reinsurance program offset much of insurers’ underestimated medical claims in the individual market. Also, despite overall losses in the individual market, the insurance industry as a whole earned modest operating profits (in addition to profits from investments).
Only some insurers fared especially poorly. One-quarter of insurers underestimated medical claims in the individual market to a much greater extent than the rest. A fifth of insurers in the individual market substantially improved their financial performance between 2013 and 2014.
All well-functioning markets have winners and losers, so it should be no surprise that some health insurers failed to succeed in the ACA’s reformed market, especially during the first year. As insurers gain greater experience with these new conditions, it can be expected that their actuarial precision will improve and that large differences in financial performance will diminish. Moreover, additional market stabilization can be expected as more previously insured people move out of grandfathered and transitional plans and into ACA-compliant coverage.
However, improved financial performance will require increased premiums, especially as the ACA’s reinsurance component phases out, starting in 2017. This reinsurance has played a crucial role in helping insurers transition. Because this has taken longer than initially expected, policymakers should consider extending the ACA’s reinsurance program until the reformed market has matured.