The ACA individual health insurance market has been an evolving market since 2014. Profitability for insurers at times has been tough. Profitability for insurers at times has been fairly easy. Circumstances and policy regimes have changed. Evaluating how competent an insurer has executed their strategy means we need to look at the context. I want to propose a metric that is similar to the baseball nerds’ Wins Above Replacement (WAR) for the ACA individual market. Instead of looking at how a baseball player does compared to a set of outrighted relievers, 5th outfielders on minor league free agent deals and everyone else who can get a cup of coffee in the Major Leagues, lets look at Profitability Above Replacement (PAR) by year.
I think there are three major PAR regimes that we can define retrospectively.
2014-2016 was a time when insurers had a very hard time making money. Any insurer that was breaking even was doing really well compared to its peers. An insurer that was routinely making money was doing exceptionally well. Insurers fundamentally mispriced the market, late changes in risk pool composition due to the sudden creation of “grandmother plans” in response to the “If you like it, you can keep it…” and the expectation that risk corridor payments would serve as a backstop but having that blow up. Every insurer was new to operating in a guaranteed issued and subsidized individual market and there were a lot of brand new insurers who were operationally incompetent while operating on thin capital cushions. Insurers as a class lost a lot of money.
2017 saw a lot of insurers leave the markets. The average level of basic competency at understanding pricing and insurance functions had increased as a lot of new entries to the insurance world either got a clue or went bankrupt. Premiums spiked. And Medical Loss Ratios were in a zone where profitability was quite plausible. Break-even or normal profits is probably a baseline expectation.
2018 to 2020 has seen a ton of profitability enhancing mechanisms. Premiums were too high in 2018 and 2019 as insurers had many monopolies and assumed the combination of CSR Silverloading and mandate repeal would have a more adverse effect on average morbidity. Claims did not spike while premium levels went up a lot. 2020 was seeing premium levels getting back to probably where they should have been by insurers holding rates flat or dropping them slightly. Insurers also got a big cash infusion from risk corridor payments from 2014-2016. And then COVID hit and utilization and claims payment just stopped for several months. Insurers should be fairly profitable in 2020 for they priced for normal utilization and got light utilization.
So what is the take-away?
In 2014-2016, an insurer losing some money does not tell us much about the insurer.
In 2018-2020, an insurer making decent profits and flirting with MLR rebates does not tell us much about the insurer.
It is only when our expectations (lose money early, make money recently) are not met, that we really need to ask what an insurer is doing differently than its peers as there is a discrepency in the PAR.