“Health insurer profitability in the individual market has risen due to substantial premium increases, government premium tax credits that pay for those premium increases, and the large, government-funded, Medicaid expansion. Since ACA implementation on January 1, 2014, health insurance stocks outperformed the S&P 500 by 106 percent.”
— executive summary, “The Profitability of Health Insurance Companies,” White House Council of Economic Advisers, March 2018
This fact check has been updated
The Council of Economic Advisers was established by law in 1946 to provide presidents with objective economic advice. Naturally, as an arm of the White House, the analyses produced under each administration tend provide economic justification for a president’s policies. But they are supposed to be grounded in facts.
Thus The Fact Checker was surprised to come across a three-page report issued by the CEA in March, just as lawmakers were deciding whether to add money to the omnibus spending bill to temporarily restore cost-sharing reduction (CSR) subsidies. The report prompted a news story in The Wall Street Journal — “Insurers Doing Well, White House Says, Raising ACA Subsidy Doubts” — and apparently played a role in lawmakers deciding not to add the money for CSRs to the bill.
CSRs are an element of the Affordable Care Act that helped lower the cost of deductibles and co-pays for people making less than 250 percent of the federal poverty level. We had previously given President Trump Four Pinocchios when he claimed insurance companies “have made a fortune” from Obamacare. Let’s see how the CEA analysis fares.
First of all, one oddity of the CEA report is that it suggests that the ACA marketplaces are relatively stable, contrary to the president’s frequent suggestion that Obamacare is collapsing. The report also noted that 85 percent of exchange buyers received a subsidy that shields them from premium increases – a fact that the president never mentions – and that “many lower-income, able-bodied, working-age adults gained Medicaid coverage.” But the report takes these positive facts and claims that the law thus has been a boon to insurance-company bottom lines.
The primary evidence? Comparing a value-weighted “health insurance stock index” created by CEA with the public indexes for the healthcare sector, the insurance sector and the Standard & Poors 500 Index. A chart in the report shows that the health-insurance index has soared above the others since the ACA was implemented in 2014.
But as the saying goes, correlation does not equal causation.
We don’t know the make-up of the CEA’s index, though a White House official in response to our queries sent a list of post-tax profit margins for Cigna, United Health Group, Aetna, Anthem and Humana. But these companies have largely abandoned the ACA exchanges, with Aetna, Humana and United Health completely out.
Moreover, if we were to construct a value-weighted index of health insurance stocks, we estimate that these five companies would have 93 percent of the overall value. About 49 percent would just be one company – United Health.
Centene and Molina, which are heavily involved in Medicaid, would make up five percent of the index. But Medicaid beneficiaries generally do not pay premiums. Medicaid companies are paid by federal and state governments directly, so they are not relevant to the discussion of the impact of eliminating cost-sharing reductions.
“CEA created an index of health insurers participating and not participating in ACA exchange and Medicaid plans; our financial software reports healthcare or insurance indices and there is no way to separate the two in the data we have access to,” the White House official said, conceding that the report covers a “a time period when some publicly traded insurers still offered plans on the exchange.”
Here’s the tip for the CEA: There’s a federal agency called the Centers for Medicare and Medicaid Services (CMS). CMS governs all the exchanges not run by the states, and insurers have to file a notice every year that they are offering coverage on the exchanges and file their “qualified health plans” with CMS; they even have information on state-based exchanges. A simple phone call would turn up a list. (Kaiser Family Foundation used this CMS data to create an interactive map.)
Katherine Hempstead, an analyst at the Robert Wood Johnson Foundation, has documented how national commercial carriers reflected in the stock index have largely abandoned the market to Blue Cross Blue Shield plans and others.
Indeed, a quick check will find why a company’s stock price increased – and it had nothing to do with Obamacare. United Health, for instance, hit the jackpot with its Optum subsidiary, which provides pharmacy benefits management and technology services. CVS said it would buy Aetna, at a premium.
Meanwhile, data filed with CMS show that in 2016, issuers of qualified health plans — health-insurance plans for the exchanges — lost nearly $5 billion, or about $394 per member, in the Obamacare exchanges. This was a slight decrease from 2015, when the plans lost nearly $6.6 billion, or about $495 per member.
All told, there were more than $13 billion in insurance-company losses in the first three years of the exchanges, according to CMS. (This information is provided under a provision of the law that, ironically, limits the profits of insurance companies, known as a medical loss ratio.)
“The report also implies that carriers are able to increase premiums at will and reap unlimited windfalls,” Hempstead said. “It doesn’t mention the rate review process, or the fact that the carriers are constrained” by the medical loss ratio.
The White House official pointed to an article in Politico that said an analysis indicated that insurers in 2017 started making money on the exchanges. The article looked at the filings of 29 regional Blue Cross Blue Shields plan with a simple formula of gross premium receipts minus medical claims. This it is not same as the “medical loss ratio,” in which 80 cents of every premium in has to be spent on medical care with the other 20 percent spent on administrative expenses (including cost of processing claims), federal, state and local taxes, all salaries, marketing, and so forth.
The article said it provided a “snapshot,” not a “definitive portrait,” and that at least eight plans almost certainly lost money.
Let’s recall that this CEA report was intended to rebut the need for cost-sharing reductions. Here’s a line from the Politico report: “Patrick Conway, CEO of Blue Cross and Blue Shield of North Carolina, points out his company would have kept 2018 premiums flat if Trump hadn’t eliminated the cost-sharing subsidy. Instead, the insurer jacked up rates by an average of 13 percent to make up for the lost funding.”
The ACA required insurance companies to offer plans with reduced deductibles and co-pays for lower-income Americans with the understanding that the federal government would make up the difference. Insurance companies do not make money through the cost-sharing provision, estimated to be worth about $7 billion in fiscal 2017. They’re being paid back for money they’ve already spent. When Trump stopped the payments, companies responded by raising premiums, mainly in the benchmark silver plans.
Ironically, because the cost of premiums is capped depending on household income, this ended up making health insurance more affordable for many families in the exchanges, as the increased cost was simply passed onto taxpayers.
The White House official argued that this move had bolstered the stability of the market: “Many health reform experts have noted that the ACA exchanges are becoming more stable as insurers have significantly raised premiums on people who are largely insensitive to the premium spikes because of the tax credit structure, and as many markets only have one or two insurers and thus little, if any, competition.”
Still, other Trump administration actions — such as eliminating the individual mandate and promoting the use of non-ACA compliant plans — run the risk of destabilizing the market.
[Note: After this fact check appeared, a White House official insisted it incorrectly suggested the administration was opposed to funding the CRSs. He pointed to a statement issued by the White House as well as a news article saying the president told lawmakers he was supportive. People involved in the debate tell a different story, saying the White House was inconsistent and confused in its approach, offering little leadership to ensure passage. The CEA report might be seen as part of this pattern. The official also faulted this fact check for not devoting more attention to the money earned by insurance companies by the Medicaid expansion. He pointed to an article in the Los Angeles Times that focused on the profits made in California by Centene and Anthem — profits that the state says it will take back in coming years.]
The Pinocchio Test
The CEA report may have had its intended political impact, but as economic analysis it does not stand up to scrutiny. The improved stock prices of a handful of companies that are no longer in Obamacare is not a useful proxy for the companies still in the market, where many continue to lose money. The report is worthy of Four Pinocchios.
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