Report: Insurers’ losses on ACA exchanges don’t amount to ‘death spiral’

The majority of insurance companies offering individual health coverage on the Affordable Care Act’s exchanges lost money on those plans in 2015, according to a new McKinsey & Co. report. The third year of open enrollment didn’t bring stability as insurers hoped, but experts think the exchanges aren't at risk of a so-called "death spiral," where increasing premiums force healthy people out of the market, which again forces premiums to increase.

Based on filings with state regulators, the report estimates aggregate post-tax losses between 9 and 11 percent for 2015, with information available from 86 percent of insurers adding up to a total estimated loss of $2.7 billion on exchange plans. Those results would mean the industry’s cumulative-margin loss doubled from 4.8 percent in McKinsey’s 2014 report.

The steeper losses may be blamed on higher medical costs and lower reinsurance payments.

“The majority (around 60%) of carriers that filed financial results publicly (as of April 28) reported a higher medical-loss ratio in 2015 than in 2014. A subset of carriers (close to one-quarter) did report positive margins in 2015, but there is some turnover between the two years in terms of which carriers generated a positive margin,” the report said.

Results varied based on number of factors, including geography, type of carrier, plan design and network.

Looking back at 2014 data, the report found HMO plans fared better than PPOs when it came to containing losses (negative 4 percent post-tax margin for HMOs vs. negative 11 percent for PPOs). In turn, HMO plans increased their premiums by roughly half those of PPO plans in 2015.

Despite those results, the report concluded there’s little chance of the exchanges going through a death spiral, as long as current federal subsidies remain in place.

“The majority of enrollees currently in the individual market—an estimated 69% of those in the market, both on and off the exchanges—qualify for subsidies, which cap their premium contributions to a percentage of income,” the report said. “Our modeling work suggests this mechanism acts as a powerful market stabilizer, making coverage affordable for a broad segment of the individual market regardless of premium increases (albeit at a higher rate of government spending).”

Long-term sustainability may require drastic changes by insurers, according to the report, suggesting carriers need to “remain nimble” and consider a business model unlike what they’re accustomed to in commercial health insurance industry.