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Report: Payers saw higher gross margins, lower loss ratios in 2020, indicating profitability

Despite a year of great uncertainty and lower than usual healthcare spending, payers appeared to have remained profitable through 2020, a new report shows.

The report, issued by the Kaiser Family Foundation, analyzed recent financial data to examine how insurance markets performed in 2020. Report authors used financial data reported by health insurance companies to the National Association of Insurance Commissioners and compiled by Mark Farrah Associates.

One indicator of insurer profitability in 2020 is gross margins per member per month, which is the amount by which premium income exceeds claims costs per enrollee per month. Though positive margins do not necessarily equate to profitability, a sharp increase in margins without a concurrent rise in administrative costs could indicate that health insurance markets became more profitable.

Overall, administrative costs for insurers fell in 2020 for a number of reasons, including the fact that payers were required to or voluntarily waived several costs related to Covid-19 testing and treatment last year. This means they had to process fewer claims.

At the same time, gross margins per member per month among individual market and fully insured group market plans were 4% and 16% higher, respectively, than they were in 2019.

In addition, annual gross margins among Medicare Advantage plans were 24% higher in 2020 compared to 2019 and 31% higher versus 2018. Similarly, gross margins for managed care organizations in the Medicaid market were 45% higher in 2020 compared with 2019 and 34% higher than in 2018.

Another indicator of payer financial performance is their medical loss ratios or the percent of premium income that insurers pay in the form of medical claims. Typically, a lower medical loss ratio represents a higher amount of income remaining for insurers. So, if administrative costs do not increase from one year to the next, a drop in medical loss ratios would imply that plans are becoming more profitable.

Annual loss ratios in the Medicare Advantage market decreased two percentage points in 2020 compared to 2019 and 2018. In the Medicaid managed care market, loss ratios dropped by four percentage points in 2020 compared with 2019 and three percentage points versus 2018.

Medical loss ratios in the fully insured group market declined by two percentage points from 2019 to 2020, and while individual market loss ratios also decreased by two percentage points in 2020 compared with 2019, they increased by four percentage points compared to 2018.

But this does not mean that payers will be able to keep all the income gained from decreased cost ratios. The Affordable Care Act includes a medical loss ratio provision that limits the amount of premium income insurers can keep for administration, marketing and profits. It requires payers to issue rebates to enrollees if their loss ratio does not meet minimum standards

In 2021, rebates are expected to total about $2.1 billion across all markets, a previous Kaiser Family Foundation analysis shows.

Photo: oatawa, Getty Images

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