Obamacare saved consumers $1.5 billion — and that’s bad news for insurers

December 5, 2012

The health-care law has a rule requiring insurers to spend at least 80 percent of health-care premiums on medical care. The good news: It's saved consumers $1.5 billion in one year! The not-so-good news: Some insurers are operating at a loss.

First, a bit on this regulation, the 80/20 rule. It requires insurers to spend at least 80 percent of subscriber premiums on medical care, rather than profits or administration. If insurers don't hit that target, they must rebate the difference to consumers. 

The Commonwealth Fund released a study today looking at how that regulation has impacted the insurance market. It found that alongside paying out $1.1 billion in rebates, insurers have also cut $350 million in administrative costs. That adds up to a $1.45 billion reduction on insurance premiums in 2011.

The lion's share of the change happened in the individual market. It's a relatively small share of the insurance market; the Commonwealth Fund estimates it covers about 10 million Americans. It's traditionally had the highest overhead costs, which meant that this new rule really changed the way it does business.

About a third of the rebates went out to those who purchase their own coverage, even though they're a tiny fragment of the 64 million Americans with private insurance.

That's the upside for consumers. There's a downside for insurers: Those who work in the individual market are now operating at a loss. This study finds that the average insurer lost $31 for each individual market customer it covered in 2011, after seeing $4 in profits in 2010. That totals up to a $351 million industry-wide loss, meaning that segment operated at a 1.2 percent operational loss. Here's all of that, again, in chart form. You can see the individual market at the very top:

Plans in the large group market — the type that cater to big companies with more than 100 employees — managed to increase their earnings by $33. So why is the individual market losing money? 

A lot of it has to do with the structural differences between the two segments. Large group plans don't really have to worry too much about marketing or customer support: Most of that gets outsourced to the human resources office of the employer they cover.

That's not true for the individual market, where insurers do a lot of the marketing and consumer support themselves. While a large market carrier can cover 100 people by striking one deal, the individual market player has to strike 100 individual deals.

Back in 2010, the year before the regulation took effect, 56 percent of the plans in the individual market were not hitting the threshold, according to study author Michael McCue, a professor of health administration at the University of Virginia. 

By way of comparison, that number stood at 30 percent in the large group market. 

McCue also adds that some of the difficulty wasn't necessarily about the new regulation, but rather about the growing cost of medicine: While medical prices grew by 11 percent, individual market premiums crept up by 6 percent. 

Those relatively low premiums increases might be the product of another Obamacare rule, which requires all double-digit increases to undergo extra scrutiny to see if they are reasonable. 

"They had that limitation going against them," McCue says. 

This does not, in McCue's view, mean the individual market is doomed, at least in the short term. Many of the companies who offer policies in the individual market also sell products in the large and small group area, meaning they can stay afloat with their more profitable segments.

"You might see some cross-subsidizing for those individual market losses," he says. 

It's hard to project what the future looks like for the individual market. Insurers probably aren't going to be thrilled about constantly subsidizing a money-losing segment. At the same time, the individual market is about to change a lot, with consumers expected to purchase coverage through new online marketplaces operated by the government. That could reduce some of the overhead generally associated with working in the individual market, and help get the segment back on its feet.

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Brad Plumer | December 5, 2012