New Data Shows Large Insurer Losses on ACA Plans

From Brian Blase of Mercatus.

"Risk corridor data released on October 1 by the administration shows that insurers lost a lot of money on Affordable Care Act (ACA) plans in 2014. The ACA established a three-year risk corridor program to transfer funds from insurers with lower-than-expected medical claims on ACA plans, i.e., profitable insurers, to insurers with higher-than-expected claims, i.e., insurers with losses. Despite administration claims that incoming payments from profitable insurers would cover losses from unprofitable ones, the risk corridor program shortfall exceeded $2.5 billion in 2014. Insurers with lower-than-anticipated claims owed about $360 million, and insurers with higher-than-anticipated claims requested about $2.9 billion from the program.

Using available data, mostly from the administration, I estimate that insurance companies likely lost at least 12% on ACA plans in 2014. There are two explanations for such large losses, with both probably true to some extent. First, a larger share of older and sicker people enrolled for ACA coverage than insurers projected. Second, some insurers underpriced plans in order to capture market share and then raise rates in future years. Many people will stick to an insurance plan because of the hassle involved with switching plans. Moreover, the ACA’s reinsurance and risk corridor programs allowed insurers to price aggressively, anticipating that a large share of any initial losses would be heavily subsidized. Insurers’ large losses on ACA plans last year and Congress’s decision late last year to prohibit taxpayer money from filling in a risk corridor shortfall will undoubtedly put upward pressure on ACA plan premiums in the next few years."

"The reinsurance program compensates insurers for people with extremely high medical expenses. In 2014, HHS paid insurers the full cost for enrollee’s claims between $45,000 and $250,000. This totaled $7.9 billion and was financed by a $63 tax on each person with private coverage."

"only a portion of the losses of insurers with actual expenses greater than expected expenses are subsidized. Using the net risk corridor deficit of $2.5 billion and the risk corridor formula, I estimate that insurers had actual claims in excess of expected claims by at least $4 billion on ACA plans in 2014."

"insurers collected total premiums of about $20.4 billion from subsidized exchange enrollees in 2014."

"87% of people who signed up for exchange coverage at HealthCare.gov received subsidies. Assuming 87% of all exchange enrollees received subsidies and equivalence between the average premium chosen by subsidized and unsubsidized exchange enrollees, insurers collected about $23.4 billion in premiums from about 5.5 million exchange policyholders in 2014."

"The insurers that tended to make the most costly pricing mistakes appear to be the new health care cooperatives established by the ACA with large federal start-up loans."

"Most of the other co-ops are in terrible financial shape. The news that HHS is limited to pay out just 12.6% of insurer risk corridor claims may lead to the collapse of additional co-ops and other smaller health insurers."

"It is important to remember that insurers lost such significant money in 2014 on ACA plans even including the $7.9 billion reinsurance program subsidy they received. Assuming $33.7 billion in total ACA plan premiums, reinsurance payments equaled about 23% of premiums collected in 2014. As the reinsurance program phases out and the risk corridor program provides much less relief than insurers had assumed, next year’s high premium increases are likely to be replicated for at least one more year."