Kaiser Family Foundation has compiled the first quarter results of on-Exchange insurers and it looks good. The two graphs below are the Medical Loss Ratio (MLR) and the net claims versus net premiums for the quarter over time.
As you can see, MLR for the first quarter dramatically dropped. We’ll see what that means in dollars in a second:
Net premiums minus net claims is the wedge that pays for administrative costs and profits. That wedge is now almost $100. Well run, large insurers should be able to keep their admin costs down to $50 to $70 per member per month.
We need to be cautious about using first quarter data. This should be the best time of the year for an insurer for a couple of reasons. First, people are still going through their deductibles. The percentage paid by the insurer as a function of total allowed charges should be the lowest all year. This matters because deductibles and other cost sharing are both a way for insurers to shift costs back onto patients and more importantly, to reduce utilization. Some people will have known chronic conditions where they hit their out of pocket max in January or February every year and their incentives don’t change year over year. Other people have a surprise one time event such as when their cat attacks them after they are not fed for eight hour straight and destroys their shoulder. These people who unexpectedly maxed out have a strong incentive to get everything that they have been putting off for a while done in the rest of the year. They will have a spike of summer and fall claims.
Secondly, and more subtly, the population changes. Open enrollment will have just ended in the first quarter. This means the insurers are probably have the most people with low utilization on their books for the entire year. People will drop out of the pool. Those drop-outs will be due to natural movement (emigration, new jobs, marriages etc) and financial reasons (the premiums are too expensive). For the people who believe that their premiums are too much, they are far more likely to be very likely to be healthy than having significant care needs. New enrollees through the Special Enrollment Periods are either babies (expensive) or people who are willing to put up the time to go through verification and validation (so more likely to be sicker than average).
So what does this mean?
My first guess, having looked at both the Kaiser report and the financials of several insurers that I’m tracking, is that insurers slightly overcharged for 2017. They upped their rates by too much.
Is the second graph showing individual premiums per person rising by over 80% over the last six years?
Yes, but need to note a few things:
1) Average actuarial value increased in the individual market
3) Guarantee issue
Not an apples to apples comparison pre 1/1/14 to post 1/1/14
This real or nominal Amero-bucks?
Anonymous At Work
Any of this due to insurers trying to spike up premiums over the risk-corridor uncertainty? What about “We’ll make medical loss 50% and dare Trump to make us share the rest”?
@Anonymous At Work: Daring Trump to not pay up seems like a bad plan.
I’m not a big fan of the way they calculate the MLR. Per their notes they exclude risk programs which I assume includes reinsurance. Carriers priced anticipating reinsurance so you create a false trend because premiums and clams are mismatched. Even If carriers priced perfectly each year the KFF analysis would show an improving MLR from 2014-2017.
@Mike: It is not perfect either, but as long as they look at every carrier’s data the net positive risk adjustment inflows will be balanced by the net negative risk adjustment outflows. If the methodology is flawed but constant, there is signal to look at. And I think there is signal to look at both on what KFF is reporting and what I have seen elsewhere.
@David Anderson: Agreed on risk adjustment but not on reinsurance. Reinsurance is not revenue neutral and its exclusion here creates artificial trends in the MLRs.
I don’t fully agree on risk adjustment. The statutory accounting rules don’t fully align with the GAAP viewpoint KFF is trying to demonstrate.
One other item is the margin chart. The health insurance provider fee was accrued in Q1 for the entire year in 2014 to 2016. That put downward pressure on net margins. There is no deduction for 2017.
Anonymous At Work
@daveNYC: Medical Loss must be at 80% overall for the year, or the rest is returned, is my understanding. Taking a medical loss of 50% means the insurance company owes you some money. Would Trump really force insurance companies to pay their subscribers, if the insurance companies overcharged?
Or a mishap with a unsuspecting mop….
@Anonymous At Work: I refuse to make any predictions about Trump because that wanker is the definition of perverse. That said, Trump doesn’t like spending money on anything but Trump and withholding that money might implode the ACA, s I’d really prefer not to risk it.