The emerging story on new entrants to the individual health insurance exchanges

Articles

How the competitive landscape on the public exchanges is continuing to unfold

With only two open enrollment periods (OEPs) completed and one year of financial performance data available, it is too early to tell which carriers are winners and losers on the public exchanges. There have been challenges to date for both new entrants and established carriers, and this market will take years to play out. The findings that follow, therefore, provide only a preliminary look at how the competitive landscape is unfolding.

Opening of federal and state marketplaces, the individual mandate, and premium subsidies have encouraged many new entrants to enter the individual health insurance market. During the 2014 OEP, about one-quarter of the 282 carriers that offered health plans on the exchanges were new entrants. Forty-eight (17%) of the carriers had prior insurance experience but no individual insurance experience in states where entering. An additional 27 (10%) had no insurance experience at all. Only four of these new entrants did not re-file for the 2015 exchanges, and an additional two withdrew during the 2015 OEP (CoOportunity Health in Iowa and Nebraska). For the 2015 OEP, 24 more new entrants joined the exchanges that had no prior individual insurance experience in the state, and 46 carriers offering individual insurance outside of the exchanges in given states entered exchanges in those states. (Note: Because insurance is regulated at the state level, we count a carrier that offers health insurance in two states as two carriers. Such a carrier would be considered a new entrant in one state if previously it had offered individual insurance only in the other state. All counts focus exclusively on on-exchange carriers.)

Altogether, after entrances and exits of new entrants and incumbents, 333 carriers competed on the 2015 exchanges; 28% of these carriers were new to their state’s individual insurance market upon joining the exchange. These new entrants included 31 carriers that had previously focused on Medicaid plans and 7 that had focused on other types of commercial insurance. Another 23 were provider-led plans. The remaining 32 were either CO-OPs or start-ups and entirely new to their state’s health insurance industry.

Preliminary evidence from 41 states suggests that the 2016 OEP will be much like the 2015 market. So far, only three of the new entrants from prior years have said they intend to withdraw in 2016 (LA Health Cooperative, Nevada Health CO-OP, Global Health). However, 14 carriers brand new to individual insurance in a given state have already announced their intention to offer exchange plans there in 2016: 5 of them are new to individual insurance and 9 are new to all insurance products in that state. In addition, 12 carriers that have been offering individual insurance outside of the exchanges in given markets have stated that they will become new entrants on the exchanges in those markets in 2016.

Several factors have likely led to the perception that the exchanges are an attractive opportunity for new entrants. For example, the presence of the individual mandate and availability of premium and cost-sharing subsidies are expected to increase the number of covered lives. In addition, barriers to entry appear to be lowered, a result of product standardization around metal tiers and essential health benefits, a standard distribution platform (the exchanges themselves), capital availability (e.g., available in 2014 for CO-OPs), elimination of underwriting, and risk mitigation mechanisms (3Rs). Furthermore, some carriers appear to expect synergies with their existing businesses (e.g., for provider-led plans, a reduction in uncompensated care and improved delivery of care; for Medicaid managed care plans, an opportunity to capture Medicaid churn).

While a number of new entrants were competitive from a pricing perspective, it is too early to tell if their competitiveness is sustainable. In 2014, new entrants offered the lowest-price silver plan for 19% of the qualified health plan-eligible population where their plans were available; in 2015, that figure rose to 46%. About three-quarters (78%) of the new entrants reported losing money after risk adjustment and reinsurance in 2014; however, it is likely that many start-ups expected to lose money in their initial year.

Although the exchanges appear to be an attractive opportunity for some, starting an insurance company from scratch is challenging. Among the reasons: These companies must rely on third parties for pricing information, since they have no prior claims experience on which to build rates. (Even incumbents were challenged to project experience under the new ACA rules, but they at least had their own individual books of business as a starting point.) Because new entrants often have less brand recognition than incumbents, they may face greater pressure to be price competitive to attract members. And, the limited capital available to them leaves them with less cushion to absorb errors in pricing or random spikes in claims.

Furthermore, because they have no established market share, companies completely new to health insurance typically find it difficult to build a provider network with competitive reimbursement levels. Also, the lack of established relationships with agents makes them more dependent on the exchanges as a distribution channel. All of these issues must be addressed while the companies attempt to establish a number of important basic operations, including enrollment, billing, claims adjudication, and customer service centers. It can be tough to deliver all of these functions at low cost when you are a small plan. To date, only 8 carriers new to individual insurance across all states where they compete have enrolled more than 100,000 commercial members.

It is worth noting that the exchanges have also been challenging for incumbents (carriers that had offered individual health insurance before the exchanges opened). Since 2014 OEP, based on announcements made to date, 58 carriers began offering exchange plans in states where they already had individual experience, while 31 incumbents pulled out of the exchanges in some markets, including 17 that exited exchanges completely (PreferredOne and Assurant in 16 states).

Most incumbents and new entrants faced challenging financial performance in 2014. A total of $3.5 billion in individual market losses (on and off exchange) were recorded by 68% of carriers, but 32% of the carriers reported a total of $949 million in gains (in both cases, after risk adjustment and reinsurance but without consideration of risk corridors). Incumbents slightly out-performed the new entrants; 35% of them made money, compared with 22% of the new entrants.

The emerging trends described in this piece provide a preliminary idea of what the competitive landscape on the 2016 exchanges will look like. Overall, it is clear that the trend toward increased competition on exchanges is continuing. Yet, it is too early to tell how new entrants will fare in the long run, as the market continues to be quite dynamic for all participants. We will continue to closely monitor exchange competitive dynamics heading up to the next OEP to further understand the evolution of the exchange landscape.

Methodology

The analyses discussed above are based on publicly available information about 2014, 2015, and 2016 exchange product offerings, as well as 2014 post-2R financial results.

For information on 2014-2015 exchange offerings, we developed a county-level database (McKinsey Center for US Health System Reform Exchange Offering Database) of all products offered in all metal tiers on the 2014 and 2015 individual exchanges across the United States. It includes details about premiums, carriers, cost-sharing provisions, product type design, and network design. Our analysis does not include off-exchange carrier participation intentions, nor do our carrier counts include carriers that exclusively offer ACA-compliant plans off-exchange.

For information on 2016 new entrants, we accessed preliminary data on 2016 carriers in 41 states based on a combination of publicly available rate filings and press releases, as of September 14, 2015. To determine whether a carrier was an incumbent, new to individual insurance, or new to all insurance, we used carrier exchange participation definitions consistent with all of our past published Intelligence Briefs. Specifically, we leveraged publicly available statutory filings from 2013 and 2014 (compiled within our McKinsey Payor Financial Database) to indicate whether a carrier had any past insurance experience, and if so, in what lines of business.

For information on post-2R financials, we have developed a carrier-level database of the 2014 year-end filings of carriers’ NAIC Supplementary Healthcare Exhibit (SHCE), which includes the year-end reported operating gain/loss by carriers in the individual market (on and off exchange), CMS reports of reinsurance and risk adjustment payments, and reported booked reinsurance and risk adjustment values as reported in carrier 2014 financial notes. Financials were assessed at a parent-level for each carrier. New entrants that have not yet reported a SHCE were omitted from the profitability analysis. CMS has delayed the release of risk corridor payment and medical loss ratio (MLR) results for an indeterminable amount of time. When this information is released, we will update our analyses to include the results of all three premium stabilization programs.

Finally, for information on total commercial lives to date to assess the current scale of new entrants, we referenced 2Q 2015 NAIC filings.