Vijay Murugappan, President and CEO
Unstable, tumultuous, and profitable? Predictions for the individual health insurance market’s outlook have varied widely since the Affordable Care Act (ACA) debuted. While a new era of stability has payers more optimistic about the outlook of the individual market, the question remains – how profitable can this market be?
Over the past few years, an attractive individual health insurance market has led many payers to seek aggressive growth and profitability. Those that weathered the early years have created strong incumbency in this market. While opportunities certainly exist, insurers looking to expand their reach in the individual market should take into consideration the following factors:
Insurer participation is predicted to increase due to the stable market outlook, making it more challenging to capture and retain market share.
Established insurers must be aware of new disruptors entering their markets with differentiated products and aggressive pricing to attempt to build a member base.
Policy issues like Medicaid expansion, a lowered age of eligibility for Medicare, and a public option may pose challenges in the future, and payers will need to adapt.
As the individual marketplace becomes more crowded, it may become more difficult to maintain profitability.
The Affordable Care Act (ACA) enables states to provide well-regulated marketplaces for individuals to purchase commercial health insurance. These exchanges have experienced many challenges during their existence – ideological and political differences around the ACA contributed to a highly unstable environment, spooking insurers during the first few years of its existence. Some of the largest insurers struggled to maintain profitability in the newly-regulated environment. In Texas, for example, almost half of the insurers left the individual exchange between 2016 - 2018.
Over the past few years, marketplaces have generally stabilized, and regulations have become more predictable. Recently, the American Rescue Plan (ARP) expanded premium subsidies for consumers looking for individual and family coverage. The Congressional Budget Office is projecting an additional 1.7 million enrollees for 2022.
CVS-Aetna, United Healthcare, Cigna, Oscar, and others have signaled plans to expand into new states or counties during 2022. Even with this newfound optimism among insurers, it is critical to understand the evolving competitive and regulatory factors in play, as these can make or break insurers’ expansion efforts.
The current attractiveness of the individual market has led to a notable increase in competition.
A stabilizing market has led to significant payer expansion efforts. The average number of marketplace insurers per state has been increasing steadily since 2018. In 2020, 45% of insurers noted an intent to increase the number of ACA plans provided to consumers. In 2021, Anthem, United, and Oscar entered regions they previously exited, and CVS/Aetna will do the same in 2022.
Counties with only one insurer have reached their lowest levels since the beginning of the exchange, with 10% of counties having a sole insurer. Only 11 counties in the United States saw a decrease in the number of insurers in 2021. In Texas, it is likely there will be several new competitors entering the exchange in 2022 and beyond as the 5-year lockout period comes to an end for all those who left the exchange due to instability in 2016 and 2017.
Insurers should expect fierce competition in states, and within rating areas, even in territories that historically were less competitive.
Industry disruptors pose competitive threats to traditional, entrenched insurers, and may at least affect short-term results.
Traditional payers should expect industry disruptors to enter new markets and offer low price points with more virtual care options. As consumer habits have become more accustomed to virtual care during the COVID-19 pandemic, these disruptors will no longer appeal to only younger or healthier consumers. This poses a serious threat to the profitability of entrenched competitors or new entrants unable to compete with such low prices, and will require enhanced network options, digital health incentives and other creative product design. Unlikely partnerships will continue to emerge as in the case of Cigna and Oscar’s partnership in Arizona, Texas and other key markets. New disruptors, such as Hydrogen Health, a joint venture between a payer (Anthem), a private equity firm (Blackstone) and a Series E startup (K Health) may also have the advantage of more agile processes and systems, along with more integrated analytics. Whether or not low prices offered by disruptors will be sustainable in the long-term, they nonetheless have the ability to disrupt the short- term results of more established payers.
Medicaid expansion could reduce the number of eligible individual marketplace consumers
There are 12 states that have not opted to expand Medicaid. With the COVID-19 pandemic, improved public opinion toward ACA, and additional monetary incentives in the ARP, it is likely that some of these remaining states will expand Medicaid in the coming years. When this occurs, lower-income individuals who currently purchase individual subsidized plans may move onto Medicaid plans.
Increased Medicare eligibility would reduce the number of individual market consumers and could lead to changes in provider reimbursement
There is an increased push lately to lower the age of eligibility for Medicare to age 60. Individuals who are high utilizers of care in this age group would likely transition to Medicare. In addition to the loss of membership in the individual market under this scenario, payers could also expect providers to try to recoup potential losses from shifting more care to Medicare plans by negotiating rates more aggressively for individual plans.
A public option is unlikely before 2024
An additional hurdle for insurers would be the passage of a public option requirement. While there have been varying public option bills introduced in Congress, the current administration has decided to essentially start from scratch, and is unlikely to pass a public option in the short-term.
A state-based or federal public option is unlikely in the short-term, but could upend the individual marketplace if signed into law.
The public option in Washington state may lend some insight into a potential state-based model for this plan, where individuals purchase the public option plan on the state-based exchange. Reimbursement rates are set at 160% of Medicare, with state representatives already pushing for lower rates.
The main concern a public option presents for insurers is that the public option’s cost advantage could eventually crowd out private plans in the marketplace. The failure of a public option in Connecticut may serve as a harbinger for what is to come in the near term for current public option legislation – private insurers investing significant dollars in preventing the passage of a public option. Positive public opinion has been steadily increasing regarding a public option, however, and insurers would be wise to begin planning for how they would maintain profitability under such a system.
Preparing for a Complex, Competitive Market
Insurers must thoroughly explore regulatory hurdles and competitive threats and how these are evolving. Unique conditions in the individual market make understanding current, pending, and future regulatory legislation essential for successful performance. There are many complex state regulatory laws and unique state benefit designs (e.g., Essential Plans in NY, ConnectorCare in MA, Value Plans in MD, etc.) that require significant planning and strategic positioning.
Properly evaluate the ROI of infrastructure investments needed for expansion. An in-depth analysis is necessary to assess the cost of entering a new market, the cost of staying in that market, and whether there are infrastructure investments that can be leveraged across states, increasing their return on investment.
Develop a highly localized How-to-Win plan. Planning for individual market expansion is regularly occurring several years out. While most payers develop a well-considered win-plan for each State they wish to enter, experience has shown that it is essential to have a detailed, MSA-by-MSA plan that considers all competitive, regulatory, and operational avenues to determine an insurer’s optimal path forward.
Each one of the state exchanges poses unique regulatory and competitive challenges. Experience has shown that insurers maximize profitability when they tailor a how-to-win plan to individual states and, in some cases, to individual MSAs.
Despite significant hurdles, insurers can achieve profitable growth in the Individual market, but it will not be easy.
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