New Data Shows Large Insurer Losses on ACA Plans

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.

3R Background

The ACA’s 3Rs (risk adjustment, reinsurance, and risk corridors) were designed to assist insurance companies selling ACA plans.

The risk adjustment program is a permanent, budget-neutral program that essentially transfers money from plans with healthier risk pools to plans with less healthy risk pools. In 2014, $4.6 billion was transferred among insurers through the risk adjustment program.

Two other temporary programs—reinsurance and risk corridors—are in effect back-end subsidy programs for insurers offering ACA plans. 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.

Insurers make risk corridor payments if expected claims were at least 3% greater than actual claims, and the government pays insurers if actual claims were at least 3% greater than expected claims. The figure below shows how risk corridor payments are calculated.

Estimates of Insurer Losses on ACA plans in 2014

As the risk corridor formula shows, 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. This is a rough approximation to how much insurers lost on ACA plans.

In order to approximate how large the losses were as a percentage of premiums, I estimated the total premium insurers collected from selling ACA plans as follows. In July 2015, the IRS projected that about 4.8 million taxpayers claimed a premium tax credit for 2014 and that the total advanced premium tax credit (APTC) amount equaled about $15.5 billion. In June 2014, the Department of Health and Human Services (HHS) estimated that people with an APTC had their share of premiums reduced by 76%. Therefore, using the administration’s numbers, insurers collected total premiums of about $20.4 billion from subsidized exchange enrollees in 2014.

HHS also reported that about 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 total amount of premiums that insurers collected for off-exchange ACA plans is more difficult to estimate because the number of off-exchange plan enrollees is not collected by HHS. Humana and many of the Blues released information showing the number of exchange plan enrollees relative to off-exchange plan enrollees. These insurers enrolled a little more than a quarter as many off-exchange enrollees as exchange enrollees. A recent Commonwealth Fund study observed that “insurers projected that only 21 percent of their anticipated 14 million ACA-compliant subscribers will be in plans sold only off the exchanges” in 2014.

Some surveys of individuals suggest that the number of people enrolled in off-exchange ACA plans may be greater than what insurers have reported. After looking at the data and surveys, I assume that enrollment in off-exchange ACA plans was 50% of exchange enrollment in 2014. (The ACA only allows subsidies in exchange plans, which is a large incentive for people below 400% of the poverty level to purchase coverage in the exchange).

Healthpocket found that exchange-only premiums are about 5 to 15% higher than plans sold both on and off the exchange. Assuming 2.7 million people enrolled in off-exchange ACA plans and that those average premiums were about 10% less than the average exchange premium, insurers collected about $10.3 billion in premiums from enrollees in off-exchange ACA plans. Altogether, I estimate that insurers collected about $33.7 billion in premiums from ACA individual market plans in 2014.

Assuming net insurer losses on ACA plans of $4 billion means that insurers’ losses on those plans equaled about 12% of premiums in 2014. Admittedly, this is a crude estimate. However, because of the assumptions I made for the calculations, the 12% estimated loss seems more likely too low than too high.

Moving Forward

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. Six of the nearly two dozen co-ops – those in Iowa/Nebraska, Kentucky,Louisiana, Nevada, New York, and Vermont – have gone out of business already. (Vermont’s co-op actually never even started.) 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. While subsidized enrollees are somewhat insulated from premium increases, unsubsidized enrollees are not. Since ACA plans have already failed to attract many people with income more than twice the poverty line, sharply higher premiums will likely cause additional adverse selection in the individual market in the near term.