More than half of health plans in Michigan experienced a financial downturn during the first three months of the year—due to losses in the stock market and one-time federal taxes—as the COVID-19 pandemic was beginning to explode in Michigan in late March.
Despite lower medical expenses, the 17 health plans reported a total net loss of $38 million, or a negative 0.8 percent total margin, and four other health insurers lost $34 million for a negative 1.4 percent total margin during the first quarter ended March 31, according to an analysis of state data by Allan Baumgarten, a Minneapolis-based consultant who also publishes the Michigan Market Review.
Last year during the same first quarter period, health plans earned a 2.7 percent net income margin and the four traditional health insurers, including Blue Cross Blue Shield of Michigan and Alliance Health and Life, recorded a 9.3 percent net income margin.
One of the major hits on health insurer bottom line in the first quarter was the Affordable Care Act's health insurance tax on revenue. The so-called Obamacare tax, which has now been phased out for 2021 by Congress, was used to partially pay for the individual market exchanges that helped expand access to health insurance to more than 8.3 million people.
For example, Blue Cross paid more than $250 million for the tax in the first quarter for its PPO, Blue Care Network and Blue Cross Complete, its Medicaid plan. The overall impact of the tax resulted in all three plans losing money for the quarter, Blue Cross said. However, it is not known how much Blue Cross has profited from selling policies on the exchange that those taxes supplement.
Because of lower expected expenses this year due to COVID-19 and a reduction in elective and nonemergency services, health plan executives said they expect reap higher-than-projected underwriting profit margins this year and some already are rebating premiums and waiving copays to members.
"It is just the first quarter that is bound to be a turbulent year" because of the COVID-19 pandemic, Baumgarten said. "States understand claims and utilization are way down. You have health plans in the commercial and Medicare business that offered premium holidays, reduced cost sharing because they want to hold on to these customers."
Starting late in the second quarter, Baumgarten said, hospitals and doctors began submitting more claims as non-emergency surgeries, procedures and visits ramps up, but utilization numbers are expected to come in far lower than expected.
"They (health insurers) should be strongly profitable for the rest of the 2020," Baumgarten said.
In the first quarter this year, Michigan health plans also paid out an average 3 percentage points less in medical expenses during the first quarter this year than the same period in 2019. The amount of medical expenses are expressed by medical loss ratios, or the percentage of premium dollars HMOs spend on medical care.
For first quarter 2020, Michigan HMOs averaged a medical loss ratio of 81 percent, compared with 83.7 percent in the same quarter in 2019. This means insurers paid out 81 percent of premiums in the first quarter for claims, compared with 83.7 percent in the same period in 2019.
Dominick Pallone, executive director with the Michigan Association of Health Plans, said one reason why that figure is down is because some increased administrative expenses to make investments on quality improvement and physician incentive programs.
"Plans normally make large administrative expenses at the beginning of the year that are intended to help produce positive outcomes on the medical side throughout the year," Pallone said. "We often see the medical loss ratio appear to be down early in the year, simply because the admin investments are weighted more heavily."
A new report from Georgetown University and the Urban Institute found health plan executives believe they are secure financially this year to deal with the COVID-19 pandemic.
The 25 health plans interviewed for the report said Medicaid enrollment is increasing, but the individual market has yet to generate much new enrollment. They also say employer-based health insurance is so far stable.
"Though insurers face a significant degree of uncertainty, they believe the crisis will have less of an impact on 2021 premiums than initially feared," the report said.
Overall, Pallone said Michigan's health plans financially should be profitable this year, but there is massive uncertainty.
"On the financial side, we still very much have a moving target, all surrounding COVID-19," Pallone said. "Medical utilization is down in April and May. We have seen some recovery in June. Pharmacy spend is staying the same."
Another positive sign is that health plans also increased total enrollment by 98,000 members in the first quarter to 1.44 million, indicating demand is high for insurance coverage, especially Medicare Advantage, Baumgarten said.
"We have seen a steady trend to move people moving into the commercial (HMO) market" the past several years, Pallone said.
Margaret Anderson, HAP's chief marketing officer, said COVID-19 didn't impact HAP's finances during the first quarter, but by the second quarter coronavirus had a "significant" impact on operations.
Second quarter claims are significantly down and operating margin is up, ahead of budget projections, she said.
"Our underwriting margin is way ahead of budget (2Q), but there is a lot to consider looking ahead for the year," she said. "We will be giving out significant rebates because we are under our medical loss ratio margins. We have risk sharing agreements that also won't show up in the second quarter" financial report.
In its first quarter report, HAP recorded a $2.9 million underwriting loss on total revenue of $382.3 million. Overall, HAP reported a net loss of $868,500, for a negative 0.2 percent margin, compared with a $5.6 million gain, or 1.7 percent margin, for the same period in 2019.
HAP officials attributed the loss to the federal health insurance tax.
Like other payers, HAP's medical loss ratio for the first quarter was higher than the 81 percent average for the group, indicating it spent more on medical expenses. HAP posted an MLR of 87.1 percent in the first quarter.
"We had some higher expected (costs) from seasonal (illness) trends and we had 8,000 new Medicare members that had higher demand for (health) care services," said Anderson, noting that HAP's Medicare Advantage enrollment has been growing substantially the last two years.
Enrollment overall has increased 1,570 members to 180,953 during the first quarter, HAP's report said.
During the past several weeks, Anderson said utilization of services has been increasing and is only 10 percent behind typical numbers for this time of year.
"We have waived all out-of-pocket costs for the year" for COVID-19 testing and treatment, said Anderson, adding HAP will absorb about $9 million to $12 million in costs.
At Priority Health, the Grand Rapids-based insurer posted net loss of $29.5 million in the first quarter, primarily due to a $72 million loss in capital gains, according to the state financial report it filed with the Michigan Department of Insurance and Financial Services.
Underwriting income was strong with $42 million in operating profits for a 4 percent margin. Enrollment also increased 47,000 in the first quarter to 591,999.
"First quarter margins are usually higher due to the seasonality of benefits," Mary Anne Jones, Priority's CFO, said. "The impact of COVID-19 could start to be seen in the first quarter. Cases were largely offset by reduced non-emergent visits."
In Michigan, average underwriting margins have ranged from as low as 0.7 percent in 2013 to a high of 3.9 percent in 2015. Underwriting margin excludes investment income gains and reflects premium revenue, medical and administrative expenses. It specifically assesses how well the health plans managed medical care.
But Jones said the net loss was due to Priority's reorganization of assets, including charges on real estate properties.
Jones said margins were also negatively affected by Obamacare's health insurer fee, which was reinstated in 2020 after a moratorium in 2019. She also said the state's health insurance provider fee was counted as revenue this year, which also contributes to an increase in administrative expense.
Like all payers, Blue Cross, Blue Care and Blue Cross Complete were hit substantially in the first quarter by the health insurance tax.
After paying the $45.5 million tax, Blue Care reported an underwriting loss of $4.8 million on total revenue of $1 billion for the first quarter, compared with a $30.3 million gain for the same period in 2019.
"The impact of COVID-19 in the first quarter was no factor in our reported results," said Paul Mozak, Blue Cross' senior vice president for finance and chief risk officer.
Mozak said Blue Cross first-quarter revenue was up 3 percent to $2.4 billion with an underwriting loss of million, compared with a $224 million gain for the same period in 2019. Blue Cross also paid $187 million tax and contributed $85 million to the Michigan Health Endowment Fund in the first quarter rather than the second.
Blue Cross Complete, the Blues Medicaid plan, recorded $11.5 million in underwriting losses, primarily based on the $16.5 million health insurance tax. Overall, Blue Cross Complete lost $13 million compared with a $9.9 million gain during the same period last year.
Mozak said Blue Cross plans project positive bottom lines for the year offset somewhat by higher administrative costs because of the economic shutdown caused by COVID-19. Blue Cross has returned about $100 million to members in premium rate cuts and copayment waivers.
McLaren Health Care Corp., a Grand Blanc-based system, operates two health plans: McLaren Health Plan, a Medicaid plan with 208,803 members, and McLaren Health Plan Community, a commercial plan with 19,977 members.
McLaren Health plan earned a net margin of 4.2 percent during the first three months, nearly the same as the same quarter in 2019.
"The first quarter for many insurers has a lot of volatility," said Dave Mazurkiewicz, McLaren's CFO. "We have a lot of estimating in the beginning of the year. We are more accurate as the year goes on."
On the other hand, McLaren Community reported a net loss of $2.1 million for a negative 8.6 percent margin on revenue of $25.3 million, 18 percent lower than same period in 2019.
"It is challenging when you have groups that are nonprofitable," said Mazurkiewicz.
Looking ahead, Mazurkiewicz said McLaren's plan operates in many Michigan markets where there is little COVID-19.
"Prior authorization rates are getting back to normal," he said. "There is a debate on how much pent-up demand there is. The rest of the state is bouncing back much more than metro Detroit."
This article originally appeared in Crain's Detroit Business.