Medicare Advantage Gross Margins Rise 41% Over 2019 Margins

Compared to 2019, the fully-insured group health insurance markets and Medicare Advantage markets have seen their margins increase and loss ratios decrease in the first half of 2020, with Medicare Advantage gross margins emerging far ahead of other markets, according to a Kaiser Family Foundation issue brief.

The issue brief relies on data from the National Association of Insurance Commissioners from 2013 to 2020.

The researchers observed payers’ gross margins—the average amount of premium income that remains after enrollee’s claim costs have been satisfied for the month.

“Gross margins are an indicator of performance, but positive margins do not necessarily translate into profitability since they do not account for administrative expenses,” the researchers wrote. "However, 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.”

As expected, the pandemic kept claims costs low in the first half of 2020. Payers have anticipated that costs for 2020 would be relatively low due to deferred care, but that they would spike in the later months of 2020 and into 2021.

Even with the abnormal healthcare costs of coronavirus testing and treatment—which most health plans covered—group market health plans saw on average a gross margins increase of 22 percent over their 2019 first half, or $20 more in left over premium income per member per month.

The Medicare Advantage market nearly doubled that increase, going up 41 percent over its margins for the first half of 2019. That equates to on average $64 more per member per month. This market had the highest gross margins, jumping from $158 per member per month in June 2019 to $222 per member per month in June 2020.

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

Though that trend has been well-established, this increase is still monumental for this market.

Typically, Medicare Advantage’s increases in profit margins are gradual, yet during the pandemic they rose 2.6 times higher than the biggest average gross margin increase of the past seven years. The next highest increase was by an increment of $24 when the average margins rose from $115 per member per month to $139 between June 2015 and June 2016.

The individual health insurance market dropped slightly, though it did not destabilize.

The individual market’s average gross margins decreased by on average $4 per member per month in the first half of 2020 from $142 per member per month in June 2019 to $138 in June 2020. This remains higher than most of this market’s performance in the last seven years: until 2017, its average gross margins had not exceeded $40 per member per month.

The researchers also observed how much payers reimbursed for medical claims—or their average simple medical loss ratio—to assess plans’ financial status. This medical loss ratio did not include factors such as quality improvements, taxes, and other elements that might influence traditional medical loss ratios particularly under the Affordable Care Act.

The individual insurance market was the only market that had a steady average medical loss ratio. Both the Medicare Advantage and group health insurance market medical loss ratios decreased from last year’s status by on average 5 percent and 3 percent, respectively.

This could mean that both Medicare Advantage and group health insurance plans are paying less in claims reimbursement, which would make sense given the months of deferred care.

“Although we cannot measure profits directly, all signs suggest that health insurers in most markets have become more profitable so far during the pandemic,” the issue brief concluded.

This may seem like a win for insurers, but the issue brief reminded that if payers fail to meet a required medical loss ratio for a certain number of years in a row, then they could face suspension, like a UHC plan that failed to satisfy the medical loss ratio requirement three years in a row. If the plan fails again in the year following suspension, it could be terminated.

Looking ahead to 2021, the researchers expected that the individual and group health insurance markets would see significant rebates.

“This may, in part, explain why many commercial insurers have volunteered to cover COVID-19 treatment costs, waived telemedicine cost-sharing, or expanded mental health services during the pandemic. By increasing their claims costs, insurers can proactively increase loss ratios and owe smaller rebates next year,” the researchers explained.