It was hard to make money selling Obamacare health insurance in the first year. Next year might not be much easier.
A study issued Wednesday suggests that uncertainty about how to price Obamacare plans, as well inaccurate guesses about the health of potential customers led to well more than half of insurers losing money on the plans when they first were sold for 2014.
The report by the Commonwealth Fund also reveals that insurers who did the best selling Obamacare plans had average profits of only around 8.5 percent, while those who fared the worst financially had steep losses that averaged nearly 22 percent.
The study further found that the medical costs faced by those insurers were only about 2 percent higher than what they had expected when they priced their plans, which went on sale in October 2013.
But the report also said that an Obamacare program that reimburses health plans for spending on high-cost enrollees was primarily responsible for keeping estimate and actual medical costs somewhat close to each other. And that program, known as reinsurance, is expiring next year.
The Commonwealth Fund report comes as insurers have been issuing their proposed prices for monthly premiums for Obamacare plans for 2017, and as some insurers have said they are abandoning Obamacare markets due to losses on their plans.
The consensus among health insurance experts is that those prices will rise by a significantly higher percentage than they did in the past several years because customers as a group have continued to have higher health needs than had been first anticipated. Another factor driving price increases is the elimination of reinsurance and another Obamacare program designed to lower the financial risks insurers face in selling individual market health plans.
On Tuesday, California’s state-run Obamacare marketplace said plans would be rising by a weighted average of 13.2 percent next year, triple the rate of increase seen in the prior two years.
Michael McCue, one of the authors of the Commonwealth Fund study, said he believed that “going forward” insurers will be more conservative in pricing their Obamacare plans, meaning they will set premiums higher than they might have in past years because of concerns about losses.
McCue and co-author Mark Hall based their report on insurers’ financial data, some of which has recently only became available for the first time.
More than 500 insurers sold Obamacare plans for 2014, which was the first year that nearly all Americans were required to have some form of health coverage or pay a fine. It was also the first year that insurers were barred from charging sicker customers higher premiums or denying coverage altogether.
Both changes, imposed by the Affordable Care Act, led to a dramatic increase in insurers who sell individual market plans. Those plans cover individuals and families who are not covered by the so-called group plan market, which provides insurance to people through their employers.
In 2012, overall premium revenue from individual plans was $30.3 billion. That nearly doubled to $59.7 billion when Obamacare took full effect in 2014.
When revenue obtained from group health insurance is factored in, insurers’ overall premium revenues increased by 6.2 percent in 2014, the report found.
But the sharp spike in revenue did not always translate into profits for insurers.
The Commonwealth Fund’s report looked at financial results for 144 of the Obamacare insurers “to further understand how the ACA affected insurers in its first full years.” Those insurers were selected because they covered at least 1,000 people on Obamacare plans, sold primarily ACA-compliant plans in 2014, and because they had financial results available from 2013, before the Obamacare marketplaces opened, providing a basis for comparison.
Of those 144 insurers, one third either remained profitable or became profitable in terms of their individual plan business in 2014, according to the Commonwealth Fund report. But the remaining two-thirds were unprofitable in terms of individual plans that year, the study found.
The report noted that about three-fourths of the unprofitable plans had incurred losses in 2013, as well as 2014. The remaining share of insurers had been profitable in 2013, only to book a loss in 2014.
McCue said the fact that losses outweighed profits for Obamacare plans in 2014 should be kept in perspective.
“Yes, it’s a loss, but again, it’s for the first year. We have to keep that in mind,” he said. “Like any new business starting out, we’re going to have some growing pains.”
McCue also noted that individual market plans are “a small book of business” to insurers who sell group coverage, meaning that even large losses can be covered by profits from the job-based insurance market.
An example of that was seen Tuesday when UnitedHealth Group, the biggest health insurance company in the United States, reported healthy earnings despite booking an extra $200 million in losses from Obamacare plans in the second quarter.
UnitedHealth, which has said it will exit most Obamacare marketplaces next year, reported that its profits rose 11 percent in the quarter, up to $1.75 billion. Revenue grew by 28 percent to $46.49 billion.
McCue told CNBC that insurers could become more profitable if more young adults become enrolled in Obamacare plans, and began paying monthly premiums to offset the health costs of older, sicker customers.
“We still don’t have a healthy risk pool, so to speak,” McCue said.”If we get the risk pool health, then we’re going to be able to lower those [premium] rates.”
McCue also said that the trend toward plans with “narrow networks” could also help control costs, and boost the chances of profitability. Narrow network plans are those that tend to have few hospitals, doctors and other health providers whose services are covered for customers. In exchange for being included in the plan’s networks, the providers tend to charge less for their services.