By Gretchen Jacobson, Rachel Fehr, Cynthia Cox, and Tricia Neuman
Kaiser Family Foundation, August 5, 2019
The Medicare Advantage, individual (also known as non-group), and fully-insured group (employer) health insurance markets are three distinctly different markets. Each of these private insurance markets has unique features that affect the profitability for insurers, and which in turn affect coverage for eligible people. These markets are dominated by many of the same health insurers, with most of the country’s largest health insurers offering plans in all three markets.
Average Gross Margins
Gross margins for Medicare Advantage plans averaged $1,608 per covered person per year between 2016 and 2018 – about double the average annual gross margins for plans in the individual and group markets ($779 and $855 per member per year, respectively).
Gross margins do not necessarily translate into profitability since they do not account for administrative expenses. Nonetheless, gross margins are an indicator of financial performance and signal how much insurers retain, including profits, after paying for enrollees’ covered medical expenses.
Variation in Gross Margins Over Time
In every year since 2006, average gross margins for Medicare Advantage plans have exceeded those of plans in the individual and group markets. The increase in average gross margins in the past few years has primarily been due to a sharp increase in the size and number of plans receiving bonus payments for high quality ratings, with total bonus payments more than doubling between 2015 and 2018.
Simple Loss Ratios
Simple loss ratios, or the percentage of premium income that insurers pay out in claims, provide further context about the financial status of each of these markets. Despite differences in gross margins, medical expenses comprised a similar share of total premiums collected (simple loss ratios) across plans in the Medicare Advantage, individual, and fully-insured group markets. Between 2016 and 2018, the medical expenses of Medicare Advantage enrollees averaged about 86% of the total premiums collected by Medicare Advantage plans (primarily federal payments for Medicare-covered benefits), which is similar to the individual market (84%) and fully-insured group market (84%) three-year averages.
As with the gross margins, the simple loss ratios do not account for administrative expenses, and medical loss ratios as defined by the ACA are generally higher because the ACA calculation makes adjustments for taxes, fees, and quality improvement expenses.
Reconciling Gross Margins and Simple Loss Ratios
Although loss ratios are similar across the three markets, gross margins are much higher for Medicare Advantage plans because both medical expenses and premiums are substantially higher for Medicare Advantage enrollees. In other words, a 5% margin, for example, in the Medicare Advantage market is a larger amount than a 5% margin in the individual or group market. People on Medicare tend to use more health care and incur higher medical expenses than people in the individual and group markets, and the federal payments (premiums) to Medicare Advantage plans are tied to the medical expenses of people in traditional Medicare.
Total Gross Margins
After aggregating gross margins across all plans and enrollees in this analysis, total gross margins were highest for the fully-insured group market for all years between 2006 and 2017. However, as of 2018, the Medicare Advantage market has caught up to the group market, with both markets reaching $27 billion in total gross margins in 2018. The rise in total gross margins for the Medicare Advantage market is primarily due to a steady increase in people enrolling in Medicare Advantage plans over the past decade. Total gross margins in the individual market remain significantly lower than the fully-insured group or Medicare Advantage markets, reaching $18 billion in 2018, in part because fewer people are covered in the individual market.
This analysis suggests insurers are profitable in each of the three markets. There is a particular focus in policy debates right now on Medicare Advantage plans. Several Medicare-for-All and other health reform proposals would allow private insurers to administer benefits under a new Medicare-like public option, which could be lucrative and attractive for health insurers, depending on how payments to plans are set. Based on the history of Medicare Advantage plans, setting payments to private plans at the appropriate rate remains a challenge, given competing goals of broadening plan choice and fiscal accountability. With a new public program or option, policymakers are likely to face similar challenges, depending on their goals and priorities.
By Don McCanne, M.D.
In the Discussion in this KFF Issue Brief the authors state, “Several Medicare-for-All and other health reform proposals would allow private insurers to administer benefits under a new Medicare-like public option, which could be lucrative and attractive for health insurers.” This report confirms, in fact, that the private Medicare Advantage plans have been highly lucrative, currently with a gross margin of $1,608 per covered person per year – about twice that for plans in the individual and group markets – money that is diverted from patient care.
As you observe politicians walking away from single payer Medicare for All and endorsing a Medicare public option, it begins to make a little more sense. They are telling us that they want us to have the option of enrolling in a private plan, while the insurers are there to be sure that the private plan option is a Medicare Advantage plan.
If you don’t understand the problem here, read the August 5 Quote of the Day from Robert Kuttner, “Harris’s Fake Medicare-for-All Plan,”: https://pnhp.org…
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