The pending departure of the big insurance company UnitedHealth from most of the Affordable Care Act exchanges that it serves has prompted critics of Obamacare to proclaim the coming "death spiral" of the insurance reform. The critics aren't talking so much about the insurers who are reporting profits from the program. Their experience shows how the ACA can be made to work for customers and insurers alike.
The most encouraging news came Tuesday from Centene, a St. Louis insurer that doubled down on the ACA, as well as other lines of business, by acquiring Woodland Hills-based Health Net earlier this year. Health Net reported about 360,000 members who received their insurance through the ACA exchanges as of March 2015. Centene reported 161,700 exchange members in 15 states in the same period. On Tuesday, however, Centene reported a combined 683,000 ACA customers as of the end of March — an increase of more than 30% for the post-merger Centene.
Centene's exchange experience continues to be favorable, andwe are achieving margins at the higher end of our targeted range.
Centene CEO Michael Neidorff
Centene reported a loss of $17 million, or 13 cents per share, on revenue of $6.9 billion for the first quarter ended March 31, compared to a profit of $63 million on $5.1 billion in revenue for the same period last year. But it attributed the loss to the costs of the Health Net merger; without that, the company says, it would have earned 74 cents per share, or about $120 million.
The company remains enthusiastic about the exchange business. "Centene's exchange experience continues to be favorable, and we are achieving margins at the higher end of our targeted range," Chairman and CEO Michael Neidorff said during a conference call Tuesday.
Centene's result came as another big insurer expressed confidence in the exchange business, counteracting the gloominess of UnitedHealth's assessment. Executives of Anthem, speaking at their quarterly call with analysts on Wednesday, said that profits and enrollment on the exchanges are beginning to brighten. They projected a profit margin of 3% to 5% on the exchanges in 14 states where Anthem sells Blue Cross and Blue Shield policies. That's up from earlier guidance of 1% to 2%. Exchange enrollments reached 975,000 in the first quarter, up from 707,000 a year ago, Anthem Chairman and CEO Joseph Swedish said.
Centene's Neidorff explained how the company has managed to succeed on the exchanges while its bigger rival UnitedHealth has failed. To begin with, Centene leveraged its experience serving Medicaid enrollees by aiming its plans at "low income subsidized individuals." Of the company's ACA enrollees, about 90% are eligible for premium subsidies. That's higher than the roughly 85% of all enrollees reported by federal officials. Neidorff indicated that the company has ported over to the ACA the plan structure of its Medicaid business, which involves offering customers narrow networks of doctors and hospitals.
The trade-off is lower premiums versus the ability to choose any doctor. Indications are that the lower premiums attract somewhat healthier customers, who may be younger than the average patient and feel they're not likely to need major treatment. They appreciate paying less and aren't bothered by limitations on where they can turn for the care they do need.
As an indicator of the success of this approach for Centene, the company has consistently been a net payer into the government's risk-adjustment program for the past two years. The program requires insurers with a disproportionately lower-risk population of customers to pay into a pool, which in turn pays out to insurers with higher risks. Centene is in the former category, meaning it has been successful at managing its risk.
Centene plainly understood the low-income individual market better than many of its rivals. UnitedHealth, which has been the most-bloodied participant in Obamacare, was chiefly a group insurer that had very little experience in the Medicaid or individual markets when ACA enrollments first began for the 2014 plan year. They appear to have aimed their marketing at higher-income customers seeking more generous health plans. The company offered broad networks, which tend to attract sicker patients, and may have set its premiums too low to make a profit from this mix. The result was hundreds of millions in losses.
"They are in a different market than we are, from what I can see," Neidorff told investment analysts during the conference call, stressing that United's core market appears to be in the high-end platinum and gold-level plans, which are chosen by fewer than 11% of all ACA enrollees, according to the Kaiser Family Foundation. Silver plans, on which premium subsidies are calculated, attract more than 68% of enrollees.
The Centene and Anthem results hint that ACA exchange costs are beginning to stabilize after three years of uncertainty. That's understandable, as insurance expert Richard Mayhew explains on the balloon-juice.com blog. It's often overlooked that the exchange market was uncharted territory when it opened in 2014. Up to then, the individual market was cherry-picked by insurers who could turn away any applicants whose medical history, age or socio-economic status made them look the least bit risky. The insurers could offer attractive premiums to everyone who was left in a pool that was largely healthy. The ACA forbid such medical underwriting, required insurers to take on all applicants and to provide minimum benefits that included pregnancy and childbirth coverage and mental health treatment. Pricing those risks was very difficult even for experienced underwriters.
As a consequence, Mayhew observes, "2014 was a year where there were only guesses about both the Exchange population, the market structure, and federal policy. ... 2015 had a bit more clarity on who was coming into the market, what was working and what was not working, and what federal policy on risk corridors would actually be. 2016 is the first year where the policies are priced on functionally decent real information and some of the amazingly dumb strategic decisions have been unwound through either course changes or through exiting the market." (He's talking about you, United.)
How these trends will unfold in coming years is still hard to assess, but they're getting easier. Not every insurer is confident of making money in the ACA exchanges, but none, thus far, are following United to the exits.