Medical loss ratio rule hitting profits of individual market insurers

The Affordable Care Act's medical loss ratio regulation hit the profits of individual market insurers harder than those of other markets, but also decreased administrative costs.

In a study published in Health Affairs, a research team led by Virginia Commonwealth University health administration professor Michael McCue examined multi-state insurers' 2010 and 2011 financial filings, and found the operating margins of group health plans to some extent compensating for declines in the individual market.

The median operating margin for for-profit individual plans fell 1.3 percent between 2010 and 2011 – ending up at around the break even point, McCue and colleagues found.

Among the 1,219 individual health plans studied, the median loss ratio increased by 5.5 percent between 2010 and 2011 – meaning they either paid more in claims or provided refunds – while the median administrative ratio fell by 2.6 percent.

In the bottom quartile of individual health plans, McCue and colleagues found increased loss ratios of 11 percent, and in both the top and bottom quartiles, administrative costs and profits declined across the board, much as the law intended.

For individual health plans in the top quartile, median administrative ratios declined by 4 percent and profits fell by six percent.

For-profit insurers saw most of the declines in operating margins as they complied with the rules for paying 80 percent of premium revenue in claims or refunds and limiting 20 percent to administrative costs and profits.

For nonprofit individual health plans, "only the change in administrative cost ratio was even marginally significant," McCue and colleagues wrote.

Among the 804 small group market health plans the team studied, "only the change in median administrative cost ratio was significant," declining by one percent between 2010 and 2011, with median profit margins ending up 3.6 percent.

[See also: Barking up the wrong tree on medical loss ratio reform]

Small group insurers had a median above 80 percent in both years, with little variation between insurers across quartiles. For for-profit small group health plans, the only significant change was a drop in administrative costs – while non-profit plans actually saw a one percent increase in the median operating margin.

Among the 750 large group health plans McCue and colleagues studied, the median administrative cost ratio "declined significantly" by about one percent between 2010 and 2011, although changes to the median loss ratio and median operating margin was not that noticeable, with median profits of around 1.8 percent.

"As was the case in the small-group market, nonprofit and for-profit insurers performed similarly in the large group market, as did insurers in the top and bottom quartiles," the team wrote.

While the annual changes were similar for both nonprofits and for-profits, they found it "notable that in each segment, nonprofit insurers reported lower operating margins and administrative costs, and higher medical loss ratios in both years, compared to for-profit insurers."

As far as profitability patterns, McCue and colleagues said that group markets have helped offset declining margins for the individual market.

"Further analysis would be required to know with greater certainty whether these apparent patterns and differences resulted primarily from the new medical loss ratio rule and these insurers' corporate traits or from other regulatory factors and market condition," McCue and colleagues wrote.

For the MLR start year of 2010, the team also found that nonprofit health plans had a median loss ratio 16 percentage points higher than for-profits, and a median administrative cost ratio 8 percentage points lower. "Thus, for-profits had much more room for improvement than nonprofits did."