Centene recorded $1.06 billion in net income in the second quarter of 2023 after recording a $172 million loss over the same period last year, according to the company’s earnings report released July 28.
“Our strong second-quarter performance demonstrates Centene’s ability to deliver excellent financial results in a dynamic healthcare landscape,” CEO Sarah London said in the report. “New business wins, strong marketplace membership growth and continued advancement of our value creation plan contributed to another solid quarter of execution. We are increasing our full year 2023 adjusted diluted EPS guidance, reflecting year-over-year growth of at least 12 percent, consistent with our long-term growth algorithm.”
Five things to know:
1. Total revenues for the quarter ended June 30 were $37.6 billion, up from $35.9 billion over the same period last year.
2. As of June 30, Centene’s total membership is 28.4 million, up from 26.4 million over the same period last year. Total Medicaid membership is 16 million, up from 15.4 million. Commercial marketplace membership is 3.3 million, up from 2 million. Total commercial membership is $3.7 million, up from 2.5 million.
3. Centene’s medical loss ratio was 87 percent in the second quarter and 86.7 percent over the same period last year.
4. Days claims payable was 52 days, a decrease of two days compared to the first quarter of 2023 and three days compared to the second quarter of 2022.
5. The company raised its year-end adjusted EPS guidance to $6.45.
Last week, the nation’s two largest Medicare Advantage insurers revealed that second quarter outpatient volumes were higher than anticipated, prompting a selloff of insurance stocks.
Minnetonka, MN-based UnitedHealth Group (UHG) executives said at a Goldman Sachs investor conference that increased outpatient utilization was driving up its medical loss ratio (MLR) to the high end of its annual target, surmising that a new wave of seniors were finally accessing elective procedures like joint replacements postponed throughout COVID.
Then, in an investor filling, Louisville, KY-based Humana noted that both outpatient and inpatient utilization levels were elevated, though it did not point to any specific causes. But not all insurers have experienced higher-than-expected utilization: Indianapolis, IN-based Elevance Health reported that its medical spending this year so far was in line with expectations, and it did not expect a surge in procedure demand.
The Gist: Health systems will find this news, especially Humana’s reports of elevated inpatient and emergency department volumes, as encouraging as the insurers consider it alarming. But the bulk of this outpatient volume isn’t necessarily returning to health systems, as the proliferation of insurer- and investor-backed ambulatory surgery centers has resulted in not only more, but also lower-cost, competition.
Health systems with significant ambulatory surgery center footprints, including Tenet and HCA, should be well-positioned to capture the volume return.
Pent-up demand for delayed healthcare during the COVID-19 pandemic is pressuring medical costs for health insurers that had a financial windfall during the pandemic amid low utilization.
UnitedHealth, the parent company of the largest private payer in the U.S., expects its medical loss ratio — the share of premiums spent on member’s healthcare costs — to be higher than previously expected in the second quarter of 2023, due to a surge in outpatient care utilization among seniors, CFO John Rex said Tuesday during Goldman Sachs’ investor conference.
The news sent UnitedHealth’s stock down 7% in morning trade Wednesday, and affected other Medicare-focused health insurers as well. Humana, CVS and Centene — the three largest MA insurers by enrollee after UnitedHealth — dropped 13%, 6% and 8%, respectively.
Dive Insight:
The early days of COVID saw widespread halts in nonessential services, causing visits to plunge with an estimated one-third of U.S. adults delaying or foregoing medical care in the pandemic’s first year. By 2022, the sizable rebound in deferred care that many predicted had yet to materialize.
Now, early signs suggest utilization may again be increasing, with the cost of rebounding care coming around to hit payers. UnitedHealth now expects its MLR for the second quarter to reach or exceed its full-year target of 82.1% to 83.1%.
“As you look at a Q2, you would expect Q2 medical care ratio to be somewhere in the zone of probably the upper bound or moderately above the upper bound of our full-year outlook,” Rex said. “I would expect at this distance that the full year would probably settle in in the upper half of the existing range we set up.”
In comparison, the insurer reported an MLR of 82.2% in the first quarter of 2023. UnitedHealth’s MLR was 82% in 2022.
UnitedHealth said the MLR increase is because medical activity is normalizing after COVID kept seniors away from non-essential care.
“We’re seeing as behaviors kind of normalize across the country in a lot of different ways and mask mandates are dropped, especially in physician offices, we’re seeing that more seniors are just more comfortable accessing services for things that they might have pushed off a bit like knees and hips,” said Tim Noel, UnitedHealth’s chief executive for Medicare and retirement.
The Minnetonka, Minnesota-based insurer has seen strong outpatient demand through April, May and June, particularly in hips and knees with high volumes at its owned ambulatory surgical centers and within its Medicare business, executives said.
Inpatient volumes have remained consistent, and while outpatient utilization has increased, patient acuity has remained the same. Optum Health’s behavioral businesses are also seeing higher utilization in the second quarter, said Patrick Conway, CEO of Care Solutions at Optum, UnitedHealth’s health services division.
UnitedHealth doesn’t expect this higher activity to let up anytime soon. As a result, the payer incorporated higher outpatient utilization into its Medicare Advantage plan bids for 2024, which were placed in early June. The move attests to the longer duration of the trend, SVB Securities analyst Whit Mayo wrote in a note.
“Assuming it is going to end quickly wouldn’t be prudent on our part,” Rex said. “We’ll see how this progresses here.”
In the mid-1980’s, managed care advocate Dr. Paul Ellwood predicted that eventually, US healthcare would be dominated by perhaps a dozen vast national firms he called SuperMeds that would combine managed care based health insurance with care delivery systems. Ellwood was a leader of the “managed competition” movement which advocated for a private sector alternative to a federal government-run National Health Insurance system. Ellwood and colleagues believed that Kaiser Foundation Health Plans and other HMOs would be able to stabilize health costs and thus affordably extend care to the uninsured.
The US political system and market dynamics would not co-operate with Ellwood and his Jackson Hole Group’s vision. In the ensuing thirty-five years, healthcare has remained both highly fragmented and regional in focus. However, unbeknownst to most, during the past decade, as a result of a major merger and relentless smaller acquisitions, two SuperMeds were born- CVS/Aetna and UnitedHealth Group, that whose combined revenues comprise 14% of total US health spending.
CVS/Aetna is slightly larger than United, by dint of grocery sales in its drugstores and its vast Caremark pharmacy benefits management business. However, CVS’s Aetna health insurance arm is one third the size of United’s, and though CVS is rapidly scaling up its care delivery apparatus through its in-store Health Hubs, it remains is a tiny fraction of United’s care footprint. Despite being slightly smaller at the top line, United’s market capitalization is more than 3.5 times that of CVS.
United’s vast scope is difficult to comprehend because much of it is not visible to the naked eye, and the most rapidly growing businesses are partly nested inside United’s health insurance business.
United employs over 300 thousand people. At $287.6 billion total revenues in 2021, United exceeded 7% of total US health spending (though $8.3 billion are from overseas operations).
In 2021, United was $100 billion larger than the British National Health Service. It is more than three times the size of Kaiser Permanente, and five times the size of HCA, the nation’s largest hospital chain. United is both larger and richer than energy giant Exxon Mobil. United has over $70 billion in cash and investments, and is generating about $2 billion a month in operating cash flow.
Its highly regulated health insurance business is the visible tip of a rapidly growing iceberg. Revenue from United’s core health insurance business grew at 11% in 2021, compared to 14% growth in United’s diversified Optum subsidiary. Optum generated $155.6 billion in 2021 (of which 60% were from INSIDE United’s health insurance business). You can see the relationship of Optum’s three major businesses to United’s health insurance operations in Exhibit I.
Optum is the Key to United’s Growth
Understanding the role of Optum is key to understanding United’s business. It is remarkable how few of my veteran health care colleagues have any idea what Optum is or what it does. Optum was once a sort of dumping ground for assorted United acquisitions without a seeming core purpose. A private equity colleague once derided Optum as “The Island of Lost Toys”. Now, however, Optum is driving United’s growth, and generates billions of dollars in unregulated profits both from inside the highly regulated core health insurance business and from external customers.
Optum consists of three parts:Optum Health, its care delivery enterprise ($54 billion revenues in 2021), Optum Rx, its pharmacy benefits management enterprise ($91 billion revenues in 2021) and Optum Insight, a diversified business services enterprise ($12.2 billion in 2021). Virtually all of United’s acquisitions join one of these three businesses.
Optum Health: The Third Largest Care Delivery Enterprise in the US
By itself, Optum Health is almost the size of HCA ($54 billion in 2021 vs HCA’s $58.7 billion) and consists of a vast national portfolio of care delivery entities: large physician groups, urgent care centers, surgicenters, imaging centers, and now by dint of the recently announced $5.7 billion acquisition of LHC, home health agencies. Optum Health has studiously avoided acquiring beds of any kind: hospitals, nursing homes, etc. and likely will continue to do so. Optum Health’s physician groups not only generate profits on their own, but also provide powerful leverage for United to control health costs for its own subscribers, pushing down United’s highly visible and regulated Medical Loss Ratio (MLR), and increasing health plan profits.
Optum Health began in 2007 when United acquired Nevada-based Sierra Health, and thus became the new owner of a small multispecialty physician group which Sierra owned. The group did not belong in United’s health insurance business and came to rest over in Optum. Over the past twelve years, Optum Health has acquired an impressive percentage of the major capitated medical groups in the US- Texas’ WellMed, California’s HealthCare Partners (from DaVita), as well as Monarch, AppleCare and North American Medical Management, Massachusetts’ Reliant (formerly Fallon Clinic) and Atrius in Massachusetts (pending) , Kelsey Seybold Clinic (also pending) in Houston, TX and Everett Clinic and PolyClinic in Seattle.
Optum Health claims over 60 thousand physicians, though many of these are actually independent physicians participating in “wrap around” risk contracting networks. By comparison, Kaiser Permanente’s Medical Groups employ about 23 thousand physicians. United’s management claims that Optum Health provides continuing care to about 20 million patients, of whom 3 million are covered by some form of so-called “value based” contracts. Perhaps half of this smaller number are covered by capitated (percentage of premium-PMPM) contracts.
Optum Health straddles fierce competitive relationships between United’s health insurance business and competing health plans in well more than a dozen metropolitan areas. Almost half (44%) of Optum Health’s revenues come from providing care for health plans other than United.
When Optum acquires a large physician group, it acquires those groups’ contracts with United’s health insurance competitors, some of which contracts have been in place for decades. Premium revenues from other health plans, presumably capitation or per member per month (PMPM) revenues, are one-quarter of Optum Health’s $54 billion total revenues. These “external” premium revenues have quadrupled since 2018, largely for Medicare Advantage subscribers. Optum Health contributes about $4.5 billion in operating profit to United. It is impossible to determine from United’s disclosures how much of this profit comes from Optum Health’s services provided to United’s insured lives and how much from its medical groups’ extensive contracts with competing health plans.
Optum Health’s surgicenters and urgent care centers provide affordable alternatives to using expensive hospital outpatient services and emergency departments, potentially further reducing United medical expense. This creates obvious tensions with United’s hospital networks, since Optum Health can use its large medical practices and virtual care offerings to divert patients from hospitals to its own services, or else render those services unnecessary.
Though some observers have termed Optum/United’s business model “vertical integration”-ownership of the suppliers to and distributors of a firm’s product– Optum Health has actually grown less vertical since 2018, with revenues from competing health plans growing from 36% of total revenues in 2018 to 44% in 2021. A 2018 analysis by ReCon Strategy found at best a sketchy matchup between United’s health plan enrollment by market and its Optum Health assets (https://reconstrategy.com/2018/04/uniteds-medicare-advantage-footprint-and-optumcare-network-do-not-overlap-much-so-far/.
Optum Rx: The Nation’s Third Largest Pharmacy Benefits Management Business
Optum’s largest business in revenues is its Optum Rx pharmaceutical benefits management (PBM) business, which generates $91 billion in revenues, and processes over a billion pharmacy claims not only for United but also many competing insurers and employer groups. Pharmaceutical costs are a rapidly growing piece of total medical expenses, and controlling them is yet another source of largely unregulated profits for United; Optum Rx generated over $4.1 billion of operating profit in 2021.
Optum Rx is the nation’s third largest PBM business after Caremark, owned by CVS/Aetna and Express Scripts, owned by CIGNA, and processes about 21% of all scripts written in the US. Pharmacy benefits management firms developed more than two decades ago to speed the conversion of patients from expensive branded drugs to generics on behalf of insurers and self-funded employers. They were given a big boost by George Bush’s 2004 Medicare Part D Prescription Drug benefit, as a “pro-competitive” private sector alternative to Medicare directly negotiating prices with pharmaceutical firms.
Reducing drug spending is one key to United’s profitability. Since generics represent almost 90% of all prescriptions written, Optum Rx now relies on fees generated by processing prescriptions and on rebates from pharmaceutical firms to promote their costly branded drugs as preferred drugs on Optum Rx’s formularies. These rebates are determined based on “list” prices for those drugs vs. the contracted price for the PBMs, and are actual cash payments from manufacturers to PBMs.
Drug rebates represent a significant fraction of operating profits for health insurers that own PBMs, particularly for their older Medicare Advantage patients that use a lot of expensive drugs. Unfortunately, PBMs have incentives to inflate the list price, because rebates are caculated based on the spread between list prices and the contract pricel Unfortunately, this increases subscribers’ cash outlays, because patient cost shares are based on list prices.
Optum Rx generates about 39% of its revenues (and an undeterminable percentage of its profits) serving other health insurers and self-funded employers. Many of those self-funded employers demand that Optum pass through the rebates directly to them (even if it means being charged higher administrative fees!).
Unlike the situation with Optum Health, the “verticality” of Optum’s PBM business-the percentage of Optum revenues derived from serving United subscribers- has increased in the last seven years, to more than 60% of Optum Rx’s total business. What happens to the billions of dollars in rebates generated by Optum Rx is impossible to determine from United’s disclosures. However, our best guess is that pharmaceutical rebates represent as much as a quarter of United’s total corporate profits.
Optum Insight: “Intelligent” Business Solutions
The fastest growing and by far the most profitable Optum business is its business intelligence/business services/consulting subsidiary. Optum Insight was generated $12.2 billion in revenues in 2021, but a 27.9% operating margin, five times that of United’s health insurance business. Optum Insight is strategically vital to enhancing the profitability of United’s health insurance activities, but also generates outside revenues selling services to United’s health insurance competitors and hospital networks.
The core of Optum Insight is a business intelligence enterprise formerly known as Ingenix, which provided “big data” to United and other insurers about hospital and pricing behavior and utilization-crucial both for benefits design and administration. In 2009, Ingenix was accused by New York State of under reporting prices for out of network health services for itself and its clients, which had the effect of reducing its own medical reimbursements, and increasing patient cost shares. United signed a consent decree to alter Ingenix business practices and settled a raft of lawsuits filed on behalf of patients, physicians and employers. Its name was subsequently changed to Optum Insight.
By dint of aggressive acquisitions, Optum Insight has dramatically increased its medical claims management business, consulting services and business process outsourcing activities. . Most of United’s investment in artificial intelligence can be found inside Optum Insight. Big data plays a crucial role in United’s overall strategy. Optum Insight’s claims management software uses vast medical claims data bases and artificial intelligence/machine learning software to spot and deny medical claims for which documentation is inadequate or where services are either “inappropriate” or else not covered by an individual’s health plan. Providers also claim that the same software rejects as many as 20% of their claims, often for problems as tiny as a mis-spelled word or a missing data field.
Optum Insight software plays a crucial role in helping United’s health insurance plans manage their medical expense. Traditional health plan profitability is generated by reducing medical expense relative to collected premiums to increase underwriting profit. These profits are regulated, with highly variable degrees of rigor by state health insurance commissioners, and also by provisions of ObamaCare enacted in 2010.
Though its acquisition of Equian in 2019 and the proposed $13 billion acquisition of health information technology conglomerate Change Healthcare in 2021, United came within an eyelash of a near monopoly on “intelligent” medical claims processing software. The Justice Department challenged this latter acquisition and United may agree to divest Change’s claims processing software business as a condition of closing the deal. Even without the Change acquisition, Optum Insight processes hundreds of millions of medical claims annually not only for United’s health insurance business but for many of United’s competitors.
However, Optum Insight’s claims management system can also be used to increase MLR if medical expense unexpectedly declines, exposing the firm to federal requirement that it rebate excessive ‘savings’ to subscribers. This happened in 2020, when the COVID pandemic dramatically and unexpectedly added billions to United’s earnings due to hospitals suspending elective care. The chart below shows United’s 2Q2020 earnings per share almost doubling due to the precipitous drop in its medical claims expenses!
Hospital finance colleagues reported an immediate and substantial drop in medical claims denials from United and other carriers in the summer and fall of 2020. United’s quarterly profits dutifully and steeply declined in the subsequent two quarters, because its medical expenses sharply rebounded. The rise in
United’s medical expenses helped the firm avoid premium rebates to patients required by provisions of the ObamaCare legislation passed in 2010. The firm did voluntarily rebate about $1.5 billion to many of its customers in June, 2020.
However the most rapidly growing part of Optum Insight is its Optum 360 business process outsourcing business, which helps hospitals manage their billing and collections revenue cycle, as well as information technology operations, supply chain (purchasing and materials management) and other services. Through Optum 360, Optum Insight has signed five long term master contracts in the past two years’ worth many billions of dollars with care providers in California, Missouri and other states to provide a broad range of business services.
With all these different businesses, it is theoretically possible for one piece of Optum to be reducing a hospital’s cash flow by denying medical claims for United subscribers, while United’s health insurance network managers bargain aggressively to reduce the hospital’s reimbursement rates while yet another piece of Optum runs the billing and collection services for the same hospital and its employed physicians, while yet another piece of Optum competes with the hospital’s physicians and ambulatory services, diverting patients from its ERs and clinics, reducing the hospital’s revenues.
It is not difficult to imagine a future in which Optum/United offers hospital systems an Optum 360 outsourcing contract that run most of the business operations of a hospital system in exchange for preferred United health plan rates, an AI-enabled EZ pass on its medical claims denials and inpatient referrals from Optum physician groups and urgent care centers, at the expense of competing hospitals.
Managing these potential conflicts will be an increasing challenge as these various businesses grow, placing intense pressure on United’s leadership to get the various pieces of United to work together. To many anxious hospital executives, United resembles nothing so much as the Kraken, rising up out of the sea, surrounding and engulfing them- a powerful friend perhaps or a fearsome foe. As you might expect, United’s growing market power and growth has generated a fierce backlash in the hospital management community.
What Business is United Healthcare In?
United Healthcare is the most successful business in the history of American healthcare. The rapid growth of Optum and continued health insurance enrollment growth from government programs like Medicaid and Medicare has created a cash engine which generates nearly $2 billion a month in free cash flow. Optum’s portfolio has given United an impressive array of tools, unequalled in the industry, to improve its profitability and to reach into every corner of the US health system. United Healthcare is managed care on steroids.
United’s diversified portfolio of businesses gives the firm what a finance-savvy colleague termed “optionality”- the ability to redirect capital and management attention to areas of growth and away from areas that have ceased to grow, in the US or overseas. With its substantial investable capital, it will have the pick of the litter of the 11 thousand digital health companies as the overextended digital health market consolidates. United will be able to use its vast resources to build state-of-the-art digital infrastructure to reach and retain patients and manage their care.
United’s main short term business risks seem to be running out of accretive transactions effectively to deploy its growing horde of capital and managing the firm’s rising political exposure. United has had tremendous business discipline and has shied away from speculative acquisitions that are not immediately accretive to earnings. If its earnings growth falters, however, it will also encounter pressure from the investment community to increase dividends (presently about 1.2%) or share buybacks to bolster its share price, or else divest some or all of Optum in order to “maximize shareholder value”.
Answering the question, “What Business is United In” is simple: just about everything in health but hospitals and nursing homes.
Answering the questions- who are its customers and what do they want? — is a great deal harder. The customers United serves are in a sort of cold war with one another. United’s original business was protecting employers from health cost growth , and tempering the influence of hospitals and doctors by reducing their rates and utilization. By fostering so-called Consumer Directed Health Plans that expose many of their subscribers to very high front-end copayments, United and its health insurance brethren, have also increased their out-of-pocket costs, whether they have the savings to pay them or not.
There are also some ironies in United’s development. Optum Insight’s suite of hospital business services are designed to reduce administrative costs created in major part by United and other insurers’ medical claims data requirements. Its PBM business, originally intended to reduce drug spending by bargaining aggressively with pharmaceutical manufacturers has ended up pushing up drug list prices and consumer cost shares.
While presumably everybody benefits if United can somehow help patients become and remain healthy, it is still far from obvious how to do this. Managing all these markedly divergent customer needs will be a tremendous management challenge for whoever succeeds United’s reclusive (and very effective) 70 year old Chairman Stephen Hemsley.
What Does Society Get from this Vast Enterprise?
However, as Peter Drucker told a different generation of business giants, businesses are not entities unto themselves, accountable only to shareholders and customers. They are organs of society, and are expected to create social value. Americans are suspicious of vast enterprises, as businesses from Standard Oil, US Steel and ATT to Microsoft and Facebook have learned. As businesses grow and become more successful, public suspicion grows.
Private health insurers already face strident opposition from progressive Democrats, who believe that health coverage ought to be a public good, a right of citizenship provided publicly; in other words, that private health insurers have no business being in business. And large insurers like United also face intense opposition from hospitals and many physicians because they reduce their incomes and impose major administrative burdens upon them.
In the age of Twitter and TikTok, United is highly vulnerable to “event risks” that confirm the hostile narratives of the firm’s detractors that United is mainly about maximizing its own profits, not about improving the health of its subscribers or the communities it serves. It is not clear how many the tens of millions of United subscribers have warm and fuzzy feelings about their giant health insurer. Memories of the HMO backlash of the 1990’s reside in the firm’s corporate memory.
United has grown to its present immense scale largely without public knowledge. United has within its reach the capability of constraining overall health cost growth across dozens of metropolitan areas and regions, not merely cost growth for its own beneficiaries (roughly one in seven US citizens already get their health insurance through United). With its expanding digital health operations, it can deploy state of the art tools for helping United’s 50 million subscribers avoid illness and live healthier lives.
United also has the ability to damage the financial operations of beloved local hospitals and deny coverage to families, raising their out of pocket expenses. How United frames and defends its social mission and how it manages all the delicate and increasingly fraught customer relationships will determine its future, and in important ways, ours as well.
The Cigna Group beat investor expectations and reported a 10 percent growth in membership year over year, according to the company’s first quarter earnings published May 5.
“Our strong results in the first quarter demonstrate how our company continues to execute well, while also introducing innovative, market-leading solutions that improve clinical outcomes, affordability and transparency for the benefit of those we serve,” Chair and CEO David Cordani said.
Total revenues in the first quarter were $46.5 billion, up 6 percent year over year.
Evernorth revenues rose 8 percent year over year to $36.2 billion. The insurance side of the business, Cigna Healthcare, reported first-quarter revenues of $12.8 billion, up 13 percent from the previous year.
In the first quarter, net income was $1.3 billion, up 6 percent year over year.
The company’s medical loss ratio was 81.3 percent in the first quarter, compared to 81.5 percent during the same period last year.
As of March 31, Cigna had 19.5 million total medical members, up 10 percent year over year.
For 2023, the company projects revenues of at least $188 billion. Full-year adjusted income from operations is projected to be at least $7.36 billion, or at least $24.70 per share.
Constrained by the Affordable Care Act’s medical loss ratio (MLR) requirement that health insurers must spend 80-85 percent of their revenue on medical services, payers have been pivoting to providing care, managing pharmacy benefits, and supporting other healthcare services, in order to fuel earnings growth. The graphic above shows why UnitedHealth Group (UHG) is seen as the health insurance industry’s most noteworthy model of this vertical integration strategy, thanks to its flourishing Optum division.
Optum is now as big a profit driver for UHG as its UnitedHealthcare insurance arm, with each bringing in $14B of net earnings in 2022.
Optum’s 7.7 percent operating margin is almost two points higher than UnitedHealthcare’s, which owes much of its revenue and earnings growth to its expanding Medicare Advantage (MA) business. As both sides of UHG’s business have grown, so too have intercompany eliminations, which have increased by over 80 percent in five years, reaching $108 billion in 2022. These payments from one division of UHG to another—mostly from the insurance business to the provider arm—allow the company to shift profit-capped insurance revenues into other divisions, driving increased profitability for the overall enterprise.
It will be worth watching the trend in intercompany eliminations at other vertically integrated insurance companies, with an eye for whether integration truly results in lower cost of care for patients or just higher margins for the insurers.
In its Q3 earnings call, Oscar Health CEO Mario Schlosser revealed that the “insurtech” has pulled out of the MA market in Texas and New York, leaving it with only one Florida-based plan. Oscar entered the MA business with high hopes in 2020, but counted fewer than 5K MA members in Q3 2022.
Although its Affordable Care Act exchange enrollment has nearly doubled since last year, now covering more than 1M lives, Oscar is still struggling with high medical loss ratios, which have kept it from turning a profit. The company’s stock price is at an all-time low, having declined over 90 percent from its peak, shortly after its 2021 IPO.
The Gist: Like Bright HealthCare before them, Oscar pulling out of MA is another sign that the chance of meaningful disruption from “insurtechs” has nearly vanished. While still privately held, Oscar achieved fame in the early 2010s through catchy marketing that targeted a young, tech-savvy client base, and its move into MA before the pandemic signaled broader ambitions.
Oscar’s travails illustrate just how hard it is to start an insurance company from scratch, even with an intriguing and comprehensive technology platform. The company proved unable to overcome its lack of market power in negotiations with providers, and faced difficulty managing a small, unstable risk pool.
Now that more traditional insurers are improving their mobile tech interfaces and telehealth offerings, the differentiated value Oscar offers to its members has clearly diminished.
Obamacare enrollment at a record-high 14.5 million
Congress may not fund premium subsidies in 2023
The Affordable Care Act marks its 12th anniversary Wednesday, and despite a record 14.5 million enrollees, the Biden administration is preparing for the possibility that millions could lose coverage next year.
The $1.9 trillion pandemic stimulus package (Public Law 117-2), signed March 2021, reduced Obamacare premiums to no more than 8.5% of income for eligible households and expanded premium subsidies to households earning more than 400% of the federal poverty level. The rescue plan also provided additional subsidies to help with out-of-pocket costs for low-income people. As a result, 2.8 million more consumers are receiving tax credits in 2022 compared to 2021.
But without congressional action, the subsidies—and the marketplace enrollment spikes they ushered in—could be lost in 2023. A new HHS report released Wednesday, shows an estimated 3.4 million Americans would lose marketplace coverage and become uninsured if the premium tax credits aren’t extended beyond 2022.
In a briefing with reporters Tuesday, Chiquita Brooks-LaSure, administrator for the Centers for Medicare & Medicaid Services, said her agency is “confident that Congress will really understand how important the subsidies were” to enrolling more people this year. The CMS would “pivot quickly,” however, to implement new policies and outreach plans if the subsidies aren’t extended as open enrollment for 2023 begins in November.
“That said, today and tomorrow we are celebrating the Affordable Care Act,” Brooks-LaSure added. “As part of that process, we’ve been reminding ourselves that sometimes it takes some time to pass legislation. And just like the Affordable Care Act took time, we’re confident that Congress is going to address these critical needs for the American people.”
After years of legal and political brawls that turned the landmark legislation into a political football, Obamacare “is at its strongest point ever,” Brooks-LaSure said. The 14.5 million total enrollees—those who extended coverage and those who signed up for the first time—is a 21% increase from last year. The number of new consumers during the 2022 open enrollment period increased by 20% to 3.1 million from 2.5 million in 2021.
This week, the Department of Health and Human Services will highlight the impact of the ACA and the Biden administration’s efforts to strengthen the law. The CMS recently announced a new special enrollment period opportunity for people with household incomes under 150% of the federal poverty level who are eligible for premium tax credits. The new special enrollment period will make it easier for low-income people to enroll in coverage throughout the year.
Troubled times could be around the corner, however, as millions of people with Medicaid coverage could become uninsured after the public health emergency ends. Under the Families First Coronavirus Response Act (Public Law 116-127), signed March 2020, states must maintain existing Medicaid enrollment until the end of the month that the public health emergency is lifted. Once the continuous enrollment mandate ends, states will resume Medicaid redeterminations and disenrollments for people who no longer meet the program’s requirements.
Dan Tsai, deputy administrator and director of the Center for Medicaid and CHIP Services at CMS, said the agency is working with states to make sure people who lose Medicaid coverage can be transferred into low- and no-cost Obamacare coverage.
“A substantial portion of individuals who will no longer be eligible for Medicaid will be eligible for other forms of coverage,” including marketplace coverage, Tsai told reporters Tuesday.
In a statement, President Joe Biden acknowledged the law’s great impact. “This law is the reason we have protections for pre-existing conditions in America. It is why women can no longer be charged more simply because they are women. It reduced prescription drug costs for nearly 12 million seniors. It allows millions of Americans to get free preventive screenings, so they can catch cancer or heart disease early—saving countless lives. And it is the reason why parents can keep children on their insurance plans until they turn 26.”
A new spring brings another anniversary of the Affordable Care Act. Twelve (sometimes tumultuous) years later, this remarkably resilient law is on firmer ground than ever before.
And there are currently no existential legal threats to the law working their way through federal courts.
In some ways, this rosy report feels unremarkable. Why expect otherwise with the law now in place for more than a decade and baked into every part of the health care system?
But this outcome was far from inevitable.
Just five years ago, Congress tried to repeal as much of the law as possible. When those broader efforts failed, Congress eliminated the much-maligned individual mandate penalty. We appeared to have reached a stalemate: Democrats could not improve the law while Republicans could not repeal it.
Could this be the moment we moved on from ACA politics?!
Enter the courts. In early 2018, Republican attorneys general sued to invalidate the mandate and, with it, the rest of the law. That lawsuit—California v. Texas—was ultimately heard by a new Supreme Court one week after the 2020 election, and the ACA was upheld just last summer.
This marked the third time that the Supreme Court largely rebuffed what could have been a crippling legal challenge to the law. It feels like ancient history now, but it is worth remembering that we were still playing “will they or won’t they?” with the Supreme Court and ACA only one year ago.
In the meantime, the Trump administration tried to undermine access to coverage under the law—except when it didn’t. I won’t list all the relevant Trump-era policies, but they had an impact: the uninsured rate rose, and marketplace enrollment declined until the 2021 plan year.
Ironically, one policy meant to destabilize the market had the opposite effect: so-called “silver loading” led to more generous marketplace subsidies and likely helped stave off even greater coverage losses.
This is the recent history that is top of mind as I reflect on the year ahead—and the work left to do to achieve universal coverage. Here are just some of the major issues facing policymakers:
• The clock is ticking toextend the American Rescue Plan Act subsidies. If Congress fails to do so, millions will face premium hikes next year and marketplace enrollment will likely drop.
• More than 2 million low-income peopleremain stuck in the Medicaid coverage gap in the 12 states that have not yet expanded their Medicaid program.
• Up to 15 million people, including nearly 6 million children, could lose Medicaid coverage at the end of the COVID-19 public health emergency.
• There is increasingly an affordability and underinsurance crisis, including for those with job-based coverage: an estimated 87 million peoplewere underinsured in 2018.
Congress and the White House are working to address these challenges, but much uncertainty remains.
“It feels like ancient history now, but it is worth remembering that we were still playing ‘will they or won’t they?’ with the Supreme Court and Affordable Care Act only one year ago.” – Katie Keith
Looking beyond Congress, 2022 will be an important year for regulatory changes. The Biden administration has proposed, but has not yet finalized, major marketplace changes. Other already-identified priorities include fixing the family glitch, limiting short-term limited duration insurance, and enhancing nondiscrimination protections. We could see movement on at least some of these rules soon.
While the Biden administration may be waiting out Congress before initiating some rulemaking, time is of the essence. New rules take many months to adopt and then take effect—followed by more time to deal with the legal challenges that typically follow.
Follow along as I dive deep on these issues and more in a new Health Affairs’ Health Reform newsletter.
We’ll highlight the latest health policy developments—from legislation to litigation—and explain what these changes mean for patients, payers, providers, and other key health care stakeholders.
It’s Your Birthday, Affordable Care Act!
In March 2020, Health Affairspublished a theme issue to celebrate the tenth anniversary of the Affordable Care Act. The issue contains many illuminating research articles on the landmark legislation, from its impact on “the cost curve” to Medicaid expansion.
Above is a datagraphic from the issue showing how the ACA affected insurance coverage.
HENRY KOTULA 