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The influx of new customers buying health insurance through public exchanges drove moderate revenue and enrollment growth for the nation's largest health insurers during the first half of the year, but it also dampened their collective profit.
The five largest publicly traded U.S. health insurers grew their combined revenue to $170.28 billion, an 11% increase over the first half of 2013. However, their combined net income increased just 2.5% to $6.97 billion.
Aetna Inc. reported a big jump in revenues over the same period last year due mainly to its 2013 acquisition of Coventry Health Care Inc.
The group's 3% increase in medical enrollments was attributable largely to individual medical plans purchased through federal and state insurance exchanges established under the Patient Protection and Affordable Care Act, as well as modest gains in Medicare and Medicaid enrollees, analysts said.
However, increased medical utilization and low pricing of certain health plans purchased by public exchange enrollees eroded insurers' profit through the first half of 2014, with three of the five posting declines compared with the 2013 first six months.
“What we're seeing is the industry's real absorption of the health care reform law,” said Jennifer Lynch, a New York-based research analyst at BMO Capital Markets. “Going into 2014, everyone knew there were going to be a lot of moving parts and adaptations required, but we're into the phase now where we're beginning to see what enrollment looks like and what claims look like.”
Analysts said the exchange-based products' negative effect on profitability would have been more pronounced without the support of stabilization programs built into the health care reform law to protect insurers from adverse risk selection and pricing volatility within the exchanges, including the transitional reinsurance and the temporary risk corridor programs — both of which will end in 2016 — and the permanent risk adjustment program.
Through the first half of the year, Humana Inc. reported $240 million in recoveries under the law's stabilization programs to offset medical claim costs and premium deficiencies within its exchange-based products. Aetna and Cigna Corp. reported recoveries of $50 million and $60 million, respectively.
UnitedHealth Group Inc. and WellPoint Inc. have not reported any material recoveries under the stabilization programs.
While the spikes in utilization and pricing miscues were anticipated, analysts said how much health insurers rely on the risk mitigation programs in the future remains to be seen.
“There's still a lot that we don't know in terms of how this is all going to play out over the remainder of this year and into 2015,” said Stephen Zaharuk, senior vice president at Moody's Investors Services Inc., New York. “We've seen that utilization for the exchange-based members is high compared to what you'd see in the general population, but we also know that the late-March surge in exchange enrollments was mostly comprised of younger, healthier individuals, so maybe that will balance out some of the early utilization.”
Despite the uncertainty surrounding the public insurance exchanges, all five health insurers indicated they plan to expand their exchange participation in 2015.
For employer-sponsored health coverage, analysts said the five insurers' organic growth in group enrollments was mostly flat, with only Humana and Aetna reporting increases in their fully insured group enrollments in the first half.
However, analysts said emerging private health insurance exchange products may soon produce a cross-current to the steady stream of employers moving from fully insured to self-funded plans.
“What we've seen in the employer-based segment this year is the continued migration of fully insured accounts over to fee-based administrative services products,” said Vishnu Lekraj, a Chicago-based senior research analyst at Morningstar Inc. “I expect that to slow down at some point, as fully insured products begin to grow with the exchange products gaining in acceptance.”
So far this year, analysts said employer uptake of private ex-changes has been limited mostly to large companies that have moved mainly to exchanges operated by benefits brokers and consultants.
“We've seen that the activity levels in those exchanges has been lower so far this year than what we saw through the back half of 2013,” said David Windley, a Nashville, Tennessee-based managing director at Jefferies & Co. Inc. “You had this cohort of early adopters that went ahead with the move last year, but it doesn't appear that we're seeing a lot of fast followers in that market.”
A slowdown in rate increases, an uptick in weather-related and other property losses, and ongoing low investment returns weighed on the largest commercial property/casualty insurers' first-half results.