UnitedHealth Group sent shockwaves through the industry last month when it announced that it was pulling back on individual exchange products in 2016 and considering pulling out of the exchanges altogether in 2017. The insurer cited higher-than expected losses on its exchange products—a $425 million shortfall on 2016 products, with $275 million of that recorded in this quarter—for the retreat. Oliver Wyman Global Head for Health Services Jim Fields, with Consultant Chris Tanner, lays out below the factors contributing to health plan margin compression and where opportunities lie in this challenging environment:
UnitedHealth Group attributed its steep product losses to higher risks and claims than anticipated, a common issue for plans participating in the exchanges. For while many plans entered the exchange at highly competitive prices targeted at winning members early, most of these same plans have highlighted the higher-than-expected claims costs.
Guaranteed-issue rules prohibit insurers from denying coverage to any individual, including those with pre-existing health conditions; and the subsidies associated with the Affordable Care Act (ACA) are encouraging low-income individuals—many of whom have a backlog of need for care—to purchase on the exchanges. As a result, claims—and costs—are soaring.
In fact, according to an Oliver Wyman analysis of more than 100 health insurance companies’ premium revenue, healthcare costs, and administrative expenses from 2011 through 2014, medical cost grew from $125 PMPM to $143, an increase of 14 percent and a compound annual growth rate (CAGR) of 4.5 percent.
Administrative costs, meanwhile, grew by 9.8 percent per year during this time. These rising costs are resulting in considerable margin compression. The analysis, which examined all lines of business—large and small employers, individual, and Medicare Advantage, also found:
- In 2011, 61 health plans made money on their healthcare underwriting, and 13 lost money. In 2014, the equivalent figures were 38 and 36. The largest one-year shift from profitability to unprofitability came from 2013 to 2014, the first year of the exchanges.
- Net underwriting margin across all lines of business, as a percentage of operating revenue went from 4.0 percent to 2.3 percent, a drop of more than 40 percent.
- Revenue at the average plan rose 25 percent over the period, a compound annual growth rate (CAGR) of 8.1 percent. The growth came mostly in the form of enrollment, which increased by 16 percent. Revenue per member per patient, however, grew only 6 percent, only slightly above the rate of inflation.
Opportunity for innovators
Clearly, UnitedHealth Group is not the only insurer grappling with the complexities of managing this higher-risk pool. However, even amidst these losses and complexities, there is great opportunity for dynamic and evolving health plans. Insurers that focus on increasing member engagement to understand the drivers of higher claims, and then manage member costs and engagement through new and innovative methods are most likely to succeed with the exchange risk pools.
Four areas where plans should focus efforts:
- Pricing. There is no question that the business needs to get priced more accurately. By 2017, most markets are expected to reach market-stable levels, in which the cost of providing care is consistent with the price being charged for that offering.
- Convenience care. With retail-based care and consumerism becoming dominant, more health services will move out of the doctor’s office and the emergency room into lower-cost, more convenient venues, such as Wal-Mart and Whole Foods. Insurers that embrace these trends can increase member touch points and, in the process, deliver the simplicity and choice that consumers desire while delivering high-quality, low-cost, preventive, and holistic care.
- Behavioral health. There is a much higher prevalence of behavioral health issues and needs in the exchange pools. Plans need to look at how they are engaging those individuals around their behavioral health issues in order to manage overall costs and claims. There are a variety of new tactics plans can use to break through the usual barriers to care, including coaching, apps, and social media platforms. Coaching and engagement of mental health patients has shown to improve treatment rates and outcomes, which can lead to better overall health outcomes.
- Technology. Technology can be used to deliver more convenient, virtual on-demand care, including mobile and at-home, at significantly lower costs than in-office or ER visits. New technologies also create an opportunity to better manage care for the most complex and costly patients.
The first two years of the exchanges have proven to be as disruptive as industry analysts predicted; yet disruption also provides a pathway to innovation.