Study: Most insurers lost money in exchanges’ first year—but were also losing money pre-ACA

A new report from the Commonwealth Fund found that while most insurers didn’t turn a profit in the first year of the Affordable Care Act’s health insurance exchanges, most of those reporting losses had been unprofitable the year prior to open enrollment.

The study, authored by Wake Forest University law professor Mark Hall and Virginia Commonwealth University health administration professor Michael McCue, analyzed CMS data from 144 insurers with at least 1,000 enrollees in the individual market which were active in 2013, and primarily sold coverage compliant with ACA standards in 2014.

The ACA nearly doubled the revenue insurers brought in through premiums in 2014, thanks to the influx of new enrollees through the marketplaces. Both medical claims and administrative costs outpaced the growth in premiums, however, resulting declining overall operating profits. In the individual market, there was an overall 4.2 percent underwriting loss.

There was substantial variability in insurers’ performance. Out of the 144 insurers, 68 (47 percent) incurred losses in both 2013 and in 2014, when the exchanges first opened. Twenty-five insurers (17 percent) generated profits both years. More insurers went from recording a loss in 2013 to generating a profit in 2014 (28 insurers, 20 percent) than vice versa (23 insurers, 16 percent).

Among the unprofitable insurers, about 75 percent incurred losses in both years.

“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,” Hall and McCue wrote.

Overall, insurers underestimated medical claims—not a surprise, according to the authors, considering the assumptions which had to be made in such a drastically changed market. Comparing projected and actual medical costs, Hall and McCue said insurers were off by about 5.6 percent, but thanks to the ACA’s reinsurance program, the cost overrun was lowered to 2.4 percent.

“One insurer can have a very different experience than another, so to draw accurate conclusions about how insurance companies are faring in the ACA marketplaces it’s important to look at their experiences comprehensively,” Hall said. “When we do that it is clear that estimating exactly how much these new enrollees would cost them was a challenge but the reinsurance program protected them from large losses on enrollees with high medical costs.”

The reinsurance program will begin to be phased out in 2017, which one UCLA professor labeled as the real reason behind major insurers deciding to leave the exchanges. Hall and McCue argued in their conclusion that an extension of the program, should be considered, since it’s taking longer than expected for insurers to make sense of the post-ACA market.