Gross Margins, MLRs May Confirm Payer Profitability in 2020

Gross margins and medical loss ratios from 2020 may confirm that payer profitability increased during the coronavirus pandemic, according to a brief from Kaiser Family Foundation.

The researchers leveraged data from the National Association of Insurance Commissioners (NAIC) to observe the pandemic’s effects on the profitability of four health insurance markets: Medicare Advantage, Medicaid managed care, the individual health insurance marketplace, and the fully-insured group health insurance marketplace.

“By the end of 2020, gross margins per member per month across these four markets remained relatively high and medical loss ratios were relatively low or flat compared to recent years,” the researchers discerned. “These findings suggest that many insurers remained profitable through 2020.”

The brief examined insurer profitability from two angles: gross margins—or the amount of premium revenue that remains each month after the payer covers members’ claims—and medical loss ratios.

When an increase in gross margins is accompanied by a flat, low, or decreasing trend in administrative spending, payer markets might experience an increase in profitability.

Gross margins for the fully-insured group market in 2020 were 16 percent higher than they were in 2019 and 14 percent higher than in 2018. In the individual health insurance market, gross margins were four percent higher than in 2019 and 14 percent higher than in 2018, when the market saw significant profitability resulting in historic rebate levels.

Medicare Advantage plans’ gross margins were 24 percent higher in 2020 versus 2019. They were 31 percent higher than the margins in 2018.

“Gross margins per member per month for Medicare Advantage plans tend to be higher than for other health insurance markets mainly because Medicare covers an older, sicker population with higher average costs,” the brief explained.

Medicaid managed care organizations saw gross margins for 2020 that were 45 percent higher than in 2019 and 34 percent higher than in 2018. In evaluating this fluctuation, however, researchers recommended taking into account that Medicaid reimbursement rates are lower than in the other markets. These gross margins may change retroactively.

When the researchers turned to analyze medical loss ratios, they were looking to see what share of the premium income went towards medical claims. If plans’ administrative costs remained stable, a drop in medical loss ratios could indicate that the payers were keeping more funds as profits.

The brief’s definition of “medical loss ratio” is not the same as the Affordable Care Act’s definition or that of CMS and the health insurer tax was in effect in 2018 and 2020 but not in 2019, both of which are factors that could impact the brief’s conclusions.

The researchers used a simple medical loss ratio for their analysis—the share of the premium that payers spent on claims.

In the Medicare Advantage market, the annual loss ratio dropped two percentage points from the 2019 and 2018 medical loss ratio levels. The Medicaid managed care market’s annual loss ratio declined four percentage points from 2019 and three from 2018.

In the fully-insured group health insurance market, annual loss ratios decreased two percentage points compared to 2019 levels but matched 2018 levels. Finally, the individual health insurance market dropped two percentage points from 2019. However, this market was four percentage points higher in its annual loss ratio than in 2018.

These lower medical loss ratios could indicate that payers in these markets were more profitable in 2020, but it is impossible to say for certain whether that is the case without the administrative cost data.

The researchers pointed out that waiving cost-sharing for coronavirus treatment, waiving telehealth visit cost-sharing, and offering premium credit or other forms of flexibility on premium payments could have lowered margins and boosted medical loss ratios. Nevertheless, they concluded that the results indicated that payers may have come more profitable during the pandemic.

Payers received a lot of backlash when the public perceived that they were raking in more revenue during the pandemic. Major payers and payer organizations like America’s Health Insurance Plans (AHIP) retorted that they would be using the revenue when the downstream impacts of delayed elective care hit.