Payer Gross Margins, Medical Loss Ratios Point to a Profitable 2020

Although utilization has started to return to normal levels, payers have continued making a profit during the third quarter of 2020, a Kaiser Family Foundation brief discovered.

“In this brief, we analyze third quarter data from 2018 to 2020 to examine how insurance markets performed financially through the end of September, as the pandemic continued and health care utilization climbed back towards previous levels,” the brief started.

The researchers relied upon National Association of Insurance Commissioners data to analyze average medical loss ratios and gross margins across multiple lines of business. The third quarter data was drawn from January 1 through September 30 for each year of the study timeframe.

Across Medicare Advantage, Medicaid managed care, the individual health insurance market, and the group health insurance market, margins were still high in September 2020 when compared to previous years.

“A sharp increase in margins from one year to the next, without a commensurate increase in administrative costs, would indicate that these health insurance markets have become more profitable during the pandemic,” the brief explained.

Indeed, while the individual health insurance market saw a gross margin of $146 per member per month through the the third quarter of 2018, the same market saw a gross margin of $158 per member per month through the third quarter of 2020.

The group health insurance market had a $78 margin in 2018 and a $92 margin in 2020.

Medicare Advantage raked in the greatest average margin overall during the pandemic year, rising from a gross margin of $139 per member per month in 2018 to $200 per member per month in 2020. Medicare Advantage gross margins on average were 35 percent higher through the third quarter in comparison to 2019 gross margins.

However, Medicaid managed care saw the biggest average increase between 2019 and 2020, even though its margins were the lowest of all four lines of business. This market went from $34 in 2019 average gross margins to $71 in average gross margins in 2020. That amounted to a 109 percent increase over its 2019 margins.

Another way to monitor payer profitability is to observe payers’ medical loss ratios.

A medical loss ratio—also known as the 80/20 rule, medical loss trend, and the medical cost ratio—sets a baseline for how much of each premium dollar must go toward consumer claims.

For example, the Affordable Care Act medical loss ratio divides claims and quality improvement costs by premiums and taxes. The brief did not calculate medical loss ratios using the ACA definition, however, choosing instead to rely upon simple medical loss ratios without accounting for taxes and other factors.

If a payer fails to spend enough of its revenue on its members, then the payer must send a rebate to the federal government. If a plan fails to meet the medical loss ratio too often, it may be suspended.

As a result, if administrative costs remain the same, then a lower medical loss ratio might indicate higher profits for the payer.

In the Medicare Advantage market, ratios dropped by four percentage points compared to this market’s performance in 2019.

The Medicaid managed care market saw its medical loss ratio drop by around seven percentage points, which was still above the 85 percent medical loss ratio threshold for that market.

The group health insurance market’s medical loss ratio declined by three percentage points on average compared to 2019.

On average, individual health insurance market loss ratios dropped by four percentage points in 2020 compared to 2019. This decrease followed very low medical loss ratios in the previous couple of years which resulted in record-high rebates.

Payers can expect to pay hefty rebates again in 2021 to Affordable Care Act marketplace members, the brief warned.

“It still appears that health insurers in most markets have become more profitable during the pandemic, though we can’t measure profits directly without administrative cost data,” the report stated.

“The return of elective and routine care this fall, coupled with the continued costs of testing and treating patients with COVID-19, contributed to slightly higher loss ratios in the Medicare Advantage and group markets in the third quarter compared to the second quarter this year, but increases in claims costs from June through September did not offset the sharp drop earlier in the year.”