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Under ACA, largest health plans net lion’s share of underwriting gains while smaller players struggle
The gap between the haves and have-nots has grown wider in the health insurance sector—and policy changes may be the culprit.
Most health plans are relatively small, posting an annual revenue of less than $2 billion, and are generally close to just breaking even financially. But the top three largest fully insured health plans by revenue—UnitedHealth Group, Kaiser Foundation Health Plan and Anthem—“exhibit performance that is dramatically differentiated from that of other market participants,” according to a new analysis from Deloitte.
For example, between 2011 and 2016, the top three saw their share of underwriting gains rise considerably even as their share of enrollment and revenue declined. By 2016, those three plans generated 84% of all underwriting gains in the fully insured market, while they accounted for just 55% in 2011. The top 10 plans, meanwhile, accounted for 92% of all underwriting gains in 2016.
What was behind that trend? Post-2014, one of the main reasons was the “number and magnitude of the losses suffered by many other health plans,” particularly in Affordable Care Act commercial individual products, the analysis said. Those losses were so large that they offset almost all the underwriting gains posted by the health plans not in the top three or top 10—thus magnifying the largest plans’ share.
For-profit insurers also grew faster and posted significantly higher margins than their nonprofit peers, the analysis found. While for-profit plans accounted for 66% of all underwriting gains in 2011, that share rose to 76% by 2016. Nonprofit plans, in comparison, saw their underwriting margins slip from 2.3% in 2011 to 0.8% in 2016.
The analysis also looked at health plan performance on the company and state levels. It found a significant increase in the number of plans with annual losses, a steep decline in average margins and widening variation among plans’ performance from 2011-2016. In addition, the number of states with health insurance market turbulence and unfavorable health plan financial performance increased.
Deloitte said its findings showed how large of a role public policy has played in driving change in the insurance markets in recent years. In addition, it highlighted the financial benefits associated with national scale.
Yet the firm also pointed out that it’s worth paying attention to how smaller-scale nonprofit plans are faring, given that they “play critical roles in their local communities and healthcare ecosystems.”
These plans, it noted, may lack the resources to withstand more disruption and “down years.” But with Republicans moving to unwind the ACA, that’s exactly what might lie ahead.
Congress floats temporary patch for CHIP funding shortfalls
In its short-term appropriations bill, Congress has included a provision aimed at helping states keep their Children’s Health Insurance Programs afloat while lawmakers try to pass a longer-term measure. But that gesture may not go nearly far enough.
The bill would direct the secretary of Health and Human Services to allocate previously unused CHIP funding first to “emergency shortfall states”—or ones that are in danger of running out of money—before other states. The federal government has already been redistributing funding from past years to states that were facing shortfalls in October and November.
Those shortfalls exist because federal funding for CHIP expired Sept. 30, and Congress’ efforts to pass funding reauthorization measure have been stalled by partisan disputes over how to pay for it. The Senate Finance Committee has advanced its version of a CHIP bill—which doesn’t outline any offsets—while a companion bill, containing cuts to other healthcare programs, cleared the House despite Democrats’ objections.
If Congress fails to pass a long-term CHIP funding measure, at least five states and the District of Columbia predict they will run out of money for the program by the end of 2017 or early in January, according to a survey from the Georgetown University’s Center for Children and Families. Some states have already sent notices to families advising them to start researching private health insurance options.
The center’s executive director, Joan Alker, also isn’t impressed by the CHIP provision in the short-term appropriations bill, calling it a sign Congress is trying to “kick the can down the road.”
“The longer Congress postpones action on long-term CHIP funding, the more states will be forced to waste time and money developing contingency plans,” she wrote in a blog post, adding, “the more states that send out notices, the more likely it will be that some kids will fall through the cracks.”
Outlook Darkens for Not-for-Profit Hospitals
The revised outlook from Moody’s comes amid a larger-than-expected drop in cash flow this year and the ongoing uncertainty regarding federal healthcare policy for public and not-for-profit hospitals.
Moody’s Investors Service has downgraded from stable to negative its 2018 outlook for the not-for-profit hospital sector based on an expected drop in operating cash flow.
“Operating cash flow declined at a more rapid pace than expected in 2017, and we expect continued contraction of 2%-4% through 2018,” said Eva Bogaty, a Moody’s vice president.
“The cash flow spike from insurance expansion under the Affordable Care Act in 2014 and 2015 has largely worn off, but cash flow has not stabilized as expected because of a low revenue and high expense growth environment,” Bogaty said.
In a briefing released Monday, Moody’s said hospital revenue growth is slowing and is expected to remain slightly above medical inflation, which declined to a low of 1.6% in September. Hospitals can’t translate volume growth into stronger revenue growth because of the lower reimbursement rate increases across all insurance providers and higher expense growth.
In addition, rising exposure to governmental payers will dampen revenue growth for the foreseeable future due to a rapidly aging population and low reimbursement rates. Medicare and Medicaid, represent 60% of gross patient revenue in 2017, Moody’s said.
Key drivers of expense growth include rising labor costs, driven by an acute nursing shortage and ongoing physician and medical specialist hiring. Technology costs are also rising as systems are upgraded and IT staff is needed for training and maintenance. While the ACA’s arrival heralded a drop in bad debt from 2014-16, bad debt rebounded in 2017 and will continue to grow at a rate of 6%-7% in 2018, Bogaty said.
“Rising copays and use of high deductible plans will increase bad debt for both expansion and non-expansion states,” she said.
In the near-term, uncertainty regarding federal healthcare policy will have a marginal fiscal impact on NFP hospitals. Bogaty said ambiguity surrounding the ACA does affect the planning and modelling of long-term strategies, while recent federal tax proposals will add to rising costs for hospitals.
The outlook could be revised to stable if operating cash flow resumes growth of 0%-4%. A change to positive could result from expectations of accelerated operating cash flow growth of more than 4% after inflation, Moody’s said.
Advocate-Aurora Merger Latest in Healthcare Consolidation Trend
Deal likely to steer clear of FTC pitfall that foiled Advocate’s prior merger plans.
Advocate Health Care and Aurora Health Care announced plans Monday for a merger that would create the 10th-largest not-for-profit health system in the country.
The proposed deal would serve as a “50-50 merger” between Chicago-based Advocate and Milwaukee-based Aurora, with no job layoffs expected, the companies said. Should the deal receive regulatory approval, the merged system, which would go by the name Advocate Aurora Health, is projected to have a total operating revenue of about $11 billion and employ 70,000 people across hundreds of facilities in Illinois and Wisconsin, including 27 hospitals.
The announced merger continues a trend among health systems to merge, buy, or sell. Since the Tenet-Vanguard merger in 2013, a $4.3 billion acquisition, large-scale mergers between health systems have become routine to keep pace with an increasingly competitive and consolidated industry.
As health systems and hospitals adjust to the push for value-based care, alternative payments and accountable care organizations, systems with less experience and knowledge have to factor in how they will achieve those goals.
The attraction of corporate consolidation
David Chou, Chief Information and Digital Officer for Children’s Mercy Kansas City, says healthcare organizations are pursuing mega-merger deals in order to maintain relevance. A company used to need $6 billion to compete, a number that has since ballooned to $10 billion, he says.
Companies have pushed toward consolidation also to achieve scale, which can enable cost-reduction and improve financial viability. Chou says healthcare companies ultimately aim to mirror the “classic Kaiser model,” referencing industry giant Kaiser Permanente of Oakland, California. In 2016, Kaiser Permanente’s total operating revenue was $64.6 billion.
Sarah Wilson, a senior analyst with Decision Resources Group, says a specific amount, such as Chou’s $10 billion figure, isn’t always a prerequisite to staying relevant, but she agreed that large-scale mergers have become increasingly common in the healthcare sector. She attributes this to the increasing cost of healthcare delivery despite the push to drive down costs.
Distance makes the heart grow fonder
Ken Field, JD, MBA, who worked for the FTC from 2006 through 2012 and now co-chairs Jones Day’s global healthcare practice, says Advocate’s proposed merger with Aurora is likely to sidestep the controversy that spoiled Advocate’s prior plan to merge with NorthShore University HealthSystem.
Given their respective geographic footprints, Advocate and Aurora appear to be complements to one another, not substitutes, Field says. While Aurora, located 93 miles north of Chicago, does serve some patients in northern Illinois, its primary clientele base hails from Wisconsin.
By contrast, Advocate’s failed NorthShore merger entailed two systems serving some of the same Chicagoland areas. Advocate defended its merger plans successfully at trial, but the decision was overruled on appeal. The prolonged and expensive legal fight ended last March.
The FTC’s acting chair, Maureen K. Ohlhausen, cited the foiled Advocate-NorthShore merger as among her team’s 2017 victories in the fight to protect competition in healthcare markets—a series of victories that mark a shift in the case law affecting the business of healthcare.
“Last year we successfully blocked two major hospital mergers, winning victories in cases involving healthcare systems in the suburbs of Chicago and the Harrisburg area of Pennsylvania,” Ohlhausen said during a speech last month at the American Bar Association’s fall forum, according to her remarks as prepared for delivery. “Together, these two cases moved an important area of the law into a much more settled place and will likely serve both the agency and the public for many years to come. We have already started building on that very sound foundation.”
Field says these two cases affirmed the FTC’s analytical framework for hospital competition as the appropriate interpretation of the law. So now there’s precedent to support the FTC’s model, which could soon prove decisive in a similar case in South Dakota, where the FTC and state attorney general are challenging Sanford Health’s planned acquisition of Mid Dakota Clinic.
Even with the new direction-setting in Washington under President Trump, the FTC’s approach to protecting competition in healthcare is expected to stay the course.
“The only indication so far is that they’re going to continue applying the same model and with the same vigor that we experienced in the last administration,” Field says.
The FTC declined to comment on Advocate’s planned Aurora merger, noting that the commission does not confirm the existence of any investigation.
Dust settling after the announcement
Wilson, the analyst, says effective mega-mergers rely on a significant amount of backend work prior to the announcement. After the plan is unveiled, companies must follow due diligence in meetings with federal and state regulatory authorities to secure approval.
“I think there’s that process of speaking with regulators, going through all of the paperwork and preparing for the actual merger to ensure you have alignment,” Wilson says. “Once you get down to the closing of the deal, [companies] make sure to have their mission, vision and values lined up. It’s a lot of work getting everything ready, speaking with employees and working through best practices.”
The risk of duplication of duties remains at a company with two CEOs, which is an interesting obstacle to face. Chou said he will be interested to see who “calls the shots” after the merger is formalized.
Citing her experience in handling health system mergers and acquisitions, Wilson says “50-50 mergers” are not uncommon. The move to keep two CEOs could be successful since the companies do not compete in the same market, she says.
Another challenge includes how to combine each company’s assets and decide on how to implement practices which provide the best care to patients. Chou advised both companies to focus on fostering a cohesive environment for employees and providing the best care for patients, rather than fixating on the politics of the merger.
Wilson echoed Chou’s sentiments, saying the post-announcement process should be deliberative and ensure employees understand the merger and its effects on the company culture.
ACA mandate repeal may be less popular than GOP thinks
The tax bill that just passed the Senate eliminates the Affordable Care Act’s individual mandate, and the House is likely to go along when Congress writes the final version. With the tax legislation moving so quickly and the mandate lost in the maze of so many other consequential provisions, we are not likely to have much public debate about this big change in health policy.
Why it matters: If we did, even though the mandate has never been popular, our polling shows that the public does not necessarily want to eliminate it as part of tax reform legislation, once they understand how it works and what the consequences of eliminating it might be.
The back story: Republicans have targeted the ACA mandate because they want the $318 billion in savings the Congressional Budget Office says they would get to help them pay for their tax cuts. (The change would save money because fewer people would get federal subsidies on the ACA marketplaces or apply for Medicaid coverage.)
They have also targeted the mandate because they think it’s so unpopular. Our polls have consistently shown that the mandate is the least popular element of the ACA and in the abstract, more Americans (55%) would eliminate the mandate than keep it (42%).
Yes, but: When people know how the mandate actually works, and are told what experts believe is likely to happen if it’s eliminated, most Americans oppose repealing it in the tax plan.
- When people learn that they will not be affected by the mandate if they already get insurance from their employer or from Medicare or Medicaid, 62% oppose eliminating it.
- When people are told that eliminating the mandate would increase premiums for people who buy their own coverage, as the CBO says it will, they also flip, with 60% opposing eliminating the mandate.
- And when they’re told that 13 million fewer people will have health coverage – another CBO projection – 59% oppose eliminating the mandate.
The bottom line: Many people change their minds when they learn more about facts and consequences, which happens as the lights shine brighter on them in legislative debates. This happened to the “skinny repeal” proposal, and it would happen to single payer.
But as the tax legislation rushes through Congress and heads to the final negotiations, there is almost no chance for the public to grasp the tradeoffs that would come from eliminating the mandate and who is affected and who is not. If they did, the polling suggests, eliminating the mandate might prove far less popular than Republicans seem to think it is.
Things to Watch
