Healthcare providers have experienced an unprecedented drop in utilization during the COVID-19 pandemic. In turn, health insurers are reporting record profits, risk-based capital levels and cash on hand. HRI spoke with PwC directors Julian Levin and Derek Skoog about how payers have fared through the pandemic and what the outlook may be for the last half of 2020.
Health insurer profits were up significantly in the second quarter of 2020. Can you provide an overview of the financial state of health insurers through the end of the second quarter?
We have seen strong profits in the first half of the year and specifically in the second quarter of 2020. Second-quarter 2020 profits were on par with the total annual profits for 2019 and 2018 for health insurers. We are seeing medical loss ratios (MLR)—the percentage of each dollar of premiums spent on medical claims and prescriptions—down by 7 percentage points for 2020 due to the drop in utilization caused by the pandemic.
We have seen the most substantial decrease in the MLR for Medicare Advantage plans, but loss ratios are down across the board.
HRI: What is the financial outlook for the second half of 2020?
Preliminary third-quarter data is showing a substantial return from the bottoming out of utilization in mid-April. Some service categories saw utilization drop to 40% to 50% of expected in April. Looking at July claims, overall cost is closer to 95% to 98% of expected for July, depending on geography and service category. Under normal circumstances, health insurers implement programs to bring down unnecessary utilization and would be ecstatic if they could reduce total cost by 1%. So even just a couple percent lower than expected remains significant.
Care could bounce back to previously budgeted levels in the fourth quarter. We could even see utilization above what was originally budgeted for the fourth quarter of 2020, due to the return of deferred care. Costs for health insurers likely will also increase in the fourth quarter as more people meet their deductibles or out-of-pocket limits. Even if the fourth quarter has higher-than-budgeted utilization, it is highly unlikely to wipe out the low utilization and resulting loss ratios from the second quarter.
Payers have moved into a strategic phase. They are considering strategic initiatives that were put on the back burner when COVID-19 hit in March and also working to stabilize near-term and long-term performance. Top of mind are initiatives that mitigate MLR rebates while simultaneously improving other aspects of the business. For example, payers are looking at provider partnerships to ensure members get the care they need this year and stop deferring needed care.
HRI: As we wrap up the third quarter, any trends worth keeping an eye on?
Derek Skoog: We continue to see lower-than-normal utilization of the ER. Patients are using the healthcare system differently. We are also seeing elevated costs per claim, which is a bit of an unfavorable trend for healthcare spending. This could be a function of the care being delivered being of higher severity as people wait to seek care until they feel they absolutely need it.
Virtual visits remain up but are certainly lower than their recent peak. Even with payment parity, the current expectation is that the total cost of a virtual visit will be less than in person, as you are less likely to see ancillary diagnostics, labs and other procedures that go along with an in-person visit. This is a favorable trend for healthcare spending.
HRI: CMS is allowing insurers to reduce 2020 premiums for individual and small group plans. Are we seeing health insurers take advantage of this flexibility for their individual and small group plans? What about large group plans?
Julian Levin: For the most part, health plans likely are going to wait as long as possible to make a decision about reducing 2020 premiums. They want as much claims data as possible to understand their likely MLR for the year before offering any premium reductions, including the impact of 2018 and 2019 on the 2020 MLR calculation, which is a rolling three-year calculation. Some insurers in a very profitable position may announce reductions earlier to better position themselves in the market, especially going into open enrollment.
We've seen this already with some large regional plans starting to announce premium credits. Other carriers may opt for a more conservative approach, providing this relief through MLR rebates to avoid overcommitting if deferred utilization returns at the end of 2020. Complicating this decision is the unknown timing and cost of a COVID-19 vaccine.
Derek Skoog: The other nuance with large groups compared to individual or small groups is that renewals happen throughout the year. When setting prices for individual and small group plans, health insurers have one opportunity each year. For large groups, plans are renewing throughout the year and so prices are also being set throughout the year, taking the current and revised future conditions into account.
HRI: What about enrollment trends? HRI estimated that nearly 20 million Americans could lose employer-sponsored coverage as a result of the pandemic-related recession. Some of these individuals may move to individual exchange plans or Medicaid. Are we seeing this movement yet?
Julian Levin: We have the least visibility into large group plans, as many are self-insured and not included in statutory financials. Looking at the fully insured large group plans, we did see a 2% drop in fully insured enrollment in the second quarter, under 1 million members losing coverage. This has not been as severe as some were predicting. Many employers furloughed employees rather than laying them off in the second quarter, keeping health benefits intact. If these furloughed individuals get laid off in the second half of the year, we could see a further reduction in employer-sponsored coverage.
HRI: Given the uncertainty around healthcare spending in the second half of the year, what actions are health insurers considering with their increased profits and capital on hand?
Derek Skoog: Payers have moved into a strategic phase. They are considering strategic initiatives that were put on the back burner when COVID-19 hit in March and also working to stabilize near-term and long-term performance.
Top of mind are initiatives that mitigate MLR rebates while simultaneously improving other aspects of the business. For example, payers are looking at provider partnerships to ensure members get the care they need this year and stop deferring needed care. This has the added benefit of likely improvement of risk adjustment coding accuracy as well as quality metric scoring. Similarly, investments in internal administrative activities that meet the quality improvement requirements have the dual benefit of MLR rebate mitigation as well as improvement in plan performance.
More strategically, payers are also looking at risk-based reimbursement models with providers as a way for both parties to have a bit more stability and predictability when it comes to revenue (providers) and expenses (payers). Some are considering direct acquisitions and expanded partnerships to further align incentives across the organizations. With additional capital, payers are also considering traditional mergers and acquisitions to serve their strategic goals, whether that be a new product, entry into a new market, improvement of certain capabilities, etc.
Director, PwC US