How some Blues made the ACA work while others failed

The individual health insurance marketplace is not a small capillary for Blue Cross and Blue Shield of Arkansas, the dominant insurer in the fourth-poorest state in the country. It's a main artery.

And the good news for the Arkansas Blues is that the individual market—a “disaster” according to presidential hopeful Donald Trump—is pumping black ink, not the blood-red ink reported by some insurers selling individual plans on the Affordable Care Act exchanges across the country.

The insurer, a not-for-profit mutual owned by USAble Mutual Insurance Co., captured nearly 90% of Arkansas' individual health plan market, which includes policies sold on and off the exchange as well as private-option Medicaid plans. The company invested in plans that had cheaper premiums but limited networks of hospitals, doctors and pharmacies—the types of plans that have been attractive to price-sensitive consumers.

The state also had some special situations with its individual market. A unique Medicaid waiver gave certain low-income people the ability to purchase private subsidized coverage on the exchange. Wal-Mart Stores, which is headquartered in Arkansas, also decided to cut health benefits for employees who work less than 30 hours per week in 2015, giving the exchange a small but influential crop of eligible marketplace enrollees.

Those strategies and circumstances allowed the Arkansas Blues to post a 6.2% underwriting margin in its individual business last year and overall positive results. The company “weathered the first phase of ACA marketplace transition well and (is) in a sound competitive position,” the firm said in its annual financial filing.

Next door, in Tennessee, a much different story unfolded. Blue Cross and Blue Shield of Tennessee posted an underwriting loss of $195.7 million on $866.4 million of revenue in 2015 just from its individual plans—a negative margin of almost 23% that gets worse when administrative expenses are tacked on. That sizable deficit prompted the insurer to bail on the exchange next year in Knoxville, Memphis and Nashville, the state's three largest cities.

Tennessee did not expand Medicaid eligibility like its western neighbor. Experts also say a unified provider community in Tennessee likely made negotiations tougher. Ultimately, the Tennessee Blues' marketplace members “had more health needs than we anticipated,” the company said in a September letter to its members.

These wildly different experiences with the ACA marketplaces played out across 34 not-for-profit and mutual Blue Cross and Blue Shield brands in 2015, according to a Modern Healthcare analysis of financial filings lodged at the National Association of Insurance Commissioners. Companies in Alabama, Illinois, Minnesota and Texas fared poorly in the second year on and off the individual marketplaces. Blue Cross and Blue Shield of Nebraska has since dropped all on-exchange plans for 2017.

But Blues plans in Florida, Michigan and New Jersey incurred few problems and have thrived. Overall, half of the 34 examined plans, which sold products in 31 states, posted positive underwriting margins last year.

The results parallel the diverging experiences of for-profit and other not-for-profit insurers nationwide. Although some like Aetna, Humana and UnitedHealth Group suffered massive losses and are retreating from the exchanges, others like Kaiser Permanente, Centene Corp., Molina Healthcare and UPMC Health Plan have handled the new markets with relative ease.

Legitimate problems have been raised by insurers. They include inadequate consumer subsidies, inadequate penalties, high out-of-pocket costs, and enrollment loopholes. But data show the ACA's experiment in building a viable individual insurance market is not going down in flames.

Insurers are having modest success in states where Medicaid was expanded and transitional “grandmothered” plans were not extended. Those state-level issues are having a major influence on whether insurers make money on and off the exchanges, said Larry Levitt, a senior vice president and health insurance expert at the Kaiser Family Foundation. Indeed, there are a number of states where insurers, even though losing money, are remaining active because they see the markets as eventually stabilizing and becoming profitable, experts say.

“Some people are going to be successful, and some people aren't,” said Craig Garthwaite, a health economist at Northwestern University. “We shouldn't expect everyone is going to be profitable in a newly created insurance market.”

The Blues plans finding success built narrow networks, which, while alienating some health insurance shoppers, keep costs down. At several Blues, actuaries predicted the risk accurately and priced accordingly, which enabled them to run in the black. Companies losing money often low-balled their risk—and their prices—in a bid to gain market share. Others that had success decided not to rely on the shaky promises of the ACA's risk-corridor program, which Republicans in Congress refused to fund. Successful plans also were able to negotiate favorable reimbursement rates with providers.

“It's clear not every single Blue Cross and Blue Shield plan is losing its shirt,” said Sabrina Corlette, a research professor at Georgetown University's Center on Health Insurance Reforms. “It's just hard to put your finger on: What's the magic formula?”

The 34 Blues plans and subsidiaries in the Modern Healthcare analysis, which did not include for-profit Anthem, had combined revenue of $135.4 billion in 2015. Nearly $24 billion of that total came from the individual market that the ACA overhauled.

The combined revenue number only encompasses fully insured, individual policies and not the substantial fees that are collected from administrative contracts with self-insured employers. Nearly all of the individual premiums are derived from ACA plans sold on and off the exchanges.

Underwriting gains and losses calculated for the individual market do not include administrative expenses, taxes and other operating costs. While those expenses could turn slim surpluses into net losses, the core underwriting numbers show how well each Blues insurer priced the risk pool in their respective markets, which experts view as a bellwether for each state's market success. The 2015 claims data were largely used to create 2017 ACA-compliant products and establish their rates. Open enrollment starts Nov. 1.

The 34 Blues plans cumulatively had an underwriting loss of $1.36 billion in the ACA's individual market in 2015, which amounted to a negative 5.8% margin. But performance varied widely by state. For next year some insurers are asking for and receiving double-digit premiums hikes, a fact that has dominated media accounts of ACA exchanges' performance.

Several Blues executives said health plans that created broad networks of hospitals and doctors with lower out-of-pocket payments faced adverse selection and lost lots of money. High-cost patients with chronic health conditions flocked to buy their coverage while healthier consumers abstained.

“It's very difficult to be the only company in the market that has a PPO offering,” said Carl McDonald, senior vice president of treasury, investments and business development at Health Care Service Corp., the owner of Blues plans in Illinois, Montana, New Mexico, Oklahoma and Texas. HCSC's total losses on the individual market from 2014 through this year are approaching $3 billion, McDonald said. Most PPO plans have since been eliminated in the company's exchange business.

Meanwhile, Horizon Blue Cross and Blue Shield of New Jersey only sold exclusive provider organization plans, or EPOs, a form of narrow networks, in the ACA marketplace in 2015. Horizon posted an underwriting gain of $142.4 million in the individual business, equaling a 17.9% margin, according to the analysis.

Explore more data from the financial results obtained for 34 Blues carriers

Some insurers that offered PPO options still managed to turn a sizable margin. Florida Blue, which sat in a competitive exchange environment, recorded a $471.1 million underwriting profit in its individual PPO plans in 2015. That resulted in a 17% underwriting margin—another high mark but still below the ACA's medical-loss ratio that capped profits at 20% of premiums.

Florida Blue Chief Financial Officer Chuck Divita attributed the margin to sound rates. Many health plans priced their premiums well below what was expected in order to sell more plans—a strategy deployed by many defunct ACA co-ops.

But he said Florida Blue did not want to get caught with low rates on an attractive plan that had a broad provider network. “If you don't get your price close right out of the gate, you're fighting an uphill battle, and you saw that in a lot of states,” Divita said.

Blue Cross and Blue Shield of North Dakota, which had a 12.1% underwriting margin in its individual business last year, took the same approach. The company did not attempt to undercut competitors and ended 2015 with almost 43,000 members. “We didn't try to go out with an aggressive strategy,” said Tony Piscione, the North Dakota Blues' vice president of actuary. “We had a lot of market share already.”

Blues companies also took different views on how to account for the ACA's risk-corridor program, a temporary mechanism to cushion the losses in the first three years.

Several insurers assumed receiving risk-corridor funding when they crafted their 2015 plans. However, the federal government has only paid out 12.6% of risk-corridor requests. Highmark, Blue Cross and Blue Shield of North Carolina and Blue Cross and Blue Shield of Minnesota, all of which suffered heavy ACA losses, are suing the government to receive the remaining money.

But other insurers assumed a worst-case scenario with that program—that either Congress would stymie the funding, which is what happened, or that the federal government would renege on its commitment.

Blue Cross and Blue Shield of Michigan assumed it wouldn't get any risk-corridor money and accordingly set premiums slightly higher than if it assumed the money would be available, said Terry Burke, vice president of individual business at the Michigan Blues. “I think that was a very prudent move on our part.” The Michigan Blues posted an underwriting gain of $177 million on $1.2 billion of revenue from its individual HMO and PPO plans last year.

Some states—the primary regulators of insurance—have unique rules that have affected outcomes. For example, Massachusetts merged the individual and small-group markets in 2007. Blue Cross and Blue Shield of Massachusetts had a slight underwriting deficit last year, and the company knows it's “going to lose money in the merged market,” Chief Financial Officer Allen Maltz said. But last year's results were still better than the early years of the ACA. “We went through the growing pains. That was five to seven years ago,” Maltz said. “We're stable right now. We have a good understanding of the market and the risk.”

Almost every Blues insurer interviewed for this article tied some of its individual-market challenges with special enrollment periods, which allow people to sign up for coverage outside of the annual window if they move, get married, have a child or encounter a few other unique circumstances. Blue Cross and Blue Shield of South Carolina, which declined an interview request, warned in its annual filing that “adverse selection, guaranteed issue and limited enforcement of open enrollment periods in the ACA individual market will produce higher medical and pharmacy costs.”

The CMS has already taken measures to tighten the enrollment exceptions. Consumer advocates worry the changes could cause people to avoid signing up for coverage. But most plans believe some enrollees are using special enrollment periods to game the system, signing up when they need expensive care and dropping coverage when they get well. “We need to get people to sign up during open enrollment and not sign up during the special enrollment period,” said McDonald of HCSC, which saw roughly a quarter of its individual membership enroll during the special periods.

Given all the flaws in the markets, no one is sanguine about the future of individual rates—even in states where insurers performed modestly well. The failure to persuade “young invincibles” to sign up for plans could put increased pressure on the remaining insurers.

“I hate to absolutely say we would never leave,” said David Anderson, CEO of HealthNow New York, the parent company of two Blues plans. HealthNow's individual underwriting margin likely will erode in 2017 as it absorbs some of the high-cost people who were enrolled with the failed Health Republic Insurance of New York co-op.

But, he said, “We would find every way to stay.”

Correction, Oct. 18, 2016:

Health Care Service Corp.'s exchange offerings include some described as narrow network PPO plans. An earlier version of this story reported that HCSC stopped selling PPO plans in the marketplaces.