Study: Off-exchange insurers spending less on care, more on overhead

Insurers that only offer coverage on the individual market outside of the Affordable Care Act’s health insurance marketplaces spent less on medical care and more on administrative costs, according to a new analysis from the Commonwealth Fund.

The study also said marketplace plans offered slightly lower premium increases in 2016 and fears of insurers trying to pull healthy enrollees away from the exchanges “are unfounded,” but the availability of exchange plans is causing off-exchange enrollment to decline.

Comparing on-exchange plans with ACA-compliant off-exchange coverage, the study found marketplace insurers spent a greater percentage of their revenues on medical costs (79.2 percent versus 77.3 percent off-exchange) and taxes (6.4 percent versus 5 percent off-exchange), while pulling in a slightly smaller percentage as profit (2 percent versus 2.8 percent off-exchange). However, on-exchange insurers spent a smaller percentage of revenue on administrative costs (11.7 versus 14.2 percent off-exchange).

“It’s not clear whether the exchanges themselves cause insurers to devote a lower proportion of premiums to overhead and profits,” the analysis said. “It is possible that insurers with historically higher overhead or profits choose not to participate in the exchanges. However, it is also possible that the exchange structure makes insurers more efficient by reducing sales and administrative costs and by increasing competition.”

On premiums, off-exchange plans rose higher per member per month in 2016 ($48 versus $40 for on-exchange), but the analysis attributed this to a shift in marketplace enrollment towards plans which limit coverage to contracted networks, as in health maintenance organizations (HMOs). On-exchange HMO plans projected a 37 percent increase in enrollment, while those same plans type off the exchange expected no increase.

For preferred provider organizations (PPOs) or point of service (POS) plans, the premium increase was nearly identical on or off the exchange ($53 versus $54).

The study also addressed the topic of risk selection, investigating the pre-exchange fear that insurers would try to keep higher risk customers on exchange plans, where many qualify for subsidies, while luring healthier customers off the exchange, allowing them to offer lower rates to lower risk people.

That hasn't happened, according to the analysis, because of the ACA's provisons aimed at spreading out risk, like limiting insurers to using a single risk pool in each state.

“We see little evidence of insurers actively pursuing risk segmentation, for example by offering leaner (i.e., lower cost but less generous) plans off of the exchanges to attract healthier people. Based on our analysis of insurers’ federal filings, this does not appear to be occurring,” the study said.

It points to the popularity of bronze, gold, and platinum-level plans as evidence. Bronze plans cover only 60 percent of medical expenses on average, but have a similar percentage of members both on and off the exchanges. Gold and platinum plans which cover more costs for higher premiums are more popular off the exchange.

The conclusion the study draws is the ACA is working as intended, at least in the individual market, despite some differences in costs for insurers on and off the exchanges. Because those reforms appear to be working, the off-exchange individual market is shrinking, with only 17 percent of individual market enrollees selecting ACA-compliant plans outside the marketplaces in 2016, down from 25 percent in 2014.