Insurers Under Pressure to Improve Margins on Health Plans

Results on Affordable Care Act worsened for many last year, after losses in 2014

By Anna Wilde Mathews
Feb. 10, 2016 8:40 p.m. ET

After most health insurers racked up financial losses on Affordable Care Act plans in 2014, many companies’ results for last year worsened, creating heavy pressure to improve performance this year.

An analysis of filings by not-for-profit Blue Cross and Blue Shield insurers—among the biggest players in the law’s exchanges for buying individual insurance—shows the challenge facing the industry as it seeks a turnaround in the individual business. They paid out more for health care in the first three quarters of 2015 than they took in from premiums on their individual plans.

On Wednesday, Humana Inc. became the latest of the big publicly traded companies to flag problems, saying its losses on individual plans deepened last year. Humana included in its 2015 results $176 million in losses it expects to incur on such plans in 2016.

Though the health law has added customers to many insurers’ rolls, much of that growth has been unprofitable, reflecting medical costs that have often run ahead of what insurers projected when they set premiums, among other factors.

The nonprofit Blues included in the regulatory-filings analysis—which was done by J.P. Morgan—had roughly $20.4 billion in individual-plan premiums over the first three quarters of 2015. Those enrollees incurred about $20.7 billion in medical claims. The result was sharply worse than a year earlier, when the premium total was larger than the claims payout.

Blue Cross and Blue Shield of Louisiana, which estimated it had a loss of $77 million on individual plans for 2015, compared with a $66 million loss in 2014, said the “overall risk of people buying insurance on the exchanges is much higher than planned for,” in part because the law hasn’t attracted enough healthy enrollees. The insurer said such losses “cannot be sustained long-term.”

In an interview, Kevin Counihan, the head of the Centers for Medicare and Medicaid Services unit charged with implementing the health law, said there were many new customers among the 12.7 million people who chose plans during enrollment for 2016, signaling that “the market is getting stronger; it’s going to be increasingly more attractive” for insurers.

In 2014, the year the health law’s marketplace plans launched, 70% of insurers lost money on individual plans in the end, McKinsey & Co. calculates.

There were some brighter spots; plans in a few states—notably California, which runs its own marketplace—produced profits. Some Medicaid-focused companies, such as Molina Healthcare Inc. and Centene Corp., have been profitable on the exchanges.

But for 2015, recent earnings calls by the largest publicly traded insurers—many of which reported strong overall results—have highlighted setbacks with the ACA business. Typically, the ACA plans represent a relatively small share of total revenue. Humana said it “continues to evaluate its participation in the individual commercial business for 2017.” The insurer has agreed to be acquired by Aetna Inc. in a deal awaiting antitrust clearance.

UnitedHealth Group Inc. said it had losses of about $475 million on its 2015 ACA-plan business, and booked $245 million of projected 2016 losses as part of 2015 results; it is considering withdrawing from exchanges.

Aetna said it saw a negative margin of 3% to 4% in 2015 on individual plans. Anthem Inc., which achieved profits on individual plans in 2014, fell back to roughly break-even in 2015, amid enrollment that came in below what it once expected.

The most dramatic signs of strain came from startup cooperative insurers launched by the health law, many of which closed their operations in the wake of losses last year.

Among the nonprofit Blues, the results in the state filings likely indicated overall loss margins of around 11% to 16% on individual plans in the first three quarters of 2015, once other expenses were factored in, said Gary Taylor, a J.P. Morgan analyst. He also said medical claims often tick up in the fourth quarter, for which state filings aren’t yet public.

In explaining losses on individual plans sold on the state health exchanges or the federal one, insurers have complained of higher expenses from consumers who sign up for coverage outside the annual open-enrollment period, often as they appear to need medical care. “We’re starting to see some issues of potential gaming of the system,” said Eric Earling, a spokesman for Premera Blue Cross. In its main market, Washington state, Premera was 8% in the black for its individual plans in 2014, but it swung to a roughly 6% loss in 2015.

Analysts said insurers themselves may have misfired in setting rates too low, either because they were hoping to grab market share or because they had little data on which to base their projections. “Some of it is based on insurers somewhat aggressively pricing this business,” said Deep Banerjee, an analyst with Standard & Poor’s Ratings Services.

The losses put a spotlight on 2016. “If 2016 is like 2015, we’ll have a real problem, because carriers could just start pulling out,” said Tom Snook, an actuary with consultants Milliman Inc.

Many insurers made changes for this year, including significant rate increases and paring of product offerings. Federal regulators have also made tweaks, including more limits on consumers’ ability to sign up for coverage outside open enrollment.

Mr. Counihan of the federal CMS said regulators are also looking closely at data about the off-season enrollees, and in situations where there “could be potential abuse, we’re going to address that and fix them.”

Some insurers are projecting improvement this year. Aetna is expecting to break even. Anthem has forecast a positive margin.

Other companies, echoing UnitedHealth and Humana, are already worried about 2016. BlueCross BlueShield of Tennessee, which estimates it lost more than $150 million on its individual business in 2015, is projecting a significant loss for 2016, said Roy Vaughn, a spokesman. That would come despite a rate increase of around 36.3% for this year’s ACA plans.

The insurer will need to seek another rate boost for 2017 “to try to get us to a level that makes it sustainable,” Mr. Vaughn said.