Most U.S. payers enjoyed a healthy 2018 and project this year to be no different — but some see red flags ahead.
Many analysts are predicting a stable outlook for the sector, citing increased profitability throughout 2018 and an aging population that could fuel Medicare Advantage growth. In good news for payers, the growing migration from inpatient to outpatient services has helped keep healthcare cost share relatively stable.
Major insurers all had mostly positive financial results to report in the first months of this year, with UnitedHealthcare Group and Cigna posting year-over-year revenue growth of 12% and 15%, respectively. Anthem and Humana had more modest single-digit growth numbers.
Relative stability of the Affordable Care Act, amid declining interest from Congress in repeal, has buoyed payers for the time being.
But the law still faces the legal challenge stemming from a Texas judge's declaration late last year that act is unconstitutional without its individual mandate. That decision is stayed, although the case is likely to drag on in the appeals process throughout this year.
Other signs of headwinds aren't hard to find. Some payers have seen recent success in the individual market but further growth in membership or margins is unlikely, analysts said. Continued provider consolidation will ramp up pricing pressure, as well employers seeking direct contracting with providers to stem the tide of employee health costs.
It adds up to 2019 potentially being the "last easy year for payers in some time," Michael Abrams, co-founder and managing partner at Numerof & Associates, told Healthcare Dive. "It's probably going to be a good year for the payer segment, but they need to be very diligent in preparing for what comes next, because I think the challenges will continue to pile up."
M&A to skew smaller, more vertical
On the M&A front, it will be hard to top last year's batch of vertical megamergers. With the CVS acquisition of Aetna complete save for some final legal wrangling and the Cigna buy of Express Scripts also a done deal, the landscape for payers will see some shifting.
Vertical deals, along with partnerships aiming to improve payer-provider collaboration and data sharing, are likely to continue as payers focus on ways to bend the cost curve, AM Best analysts said. That includes a focus on preventive care and chronic disease management as well as alternative care settings like urgent care centers, which are less expensive than hospital ERs.
Instead of more blockbuster deals, though, analysts expect smaller and mid-sized companies will be most like to engage in M&A activity this year. Since a few major players already dominate the sector, continued integration at top levels is unlikely.
Medicare Advantage main growth area
Top payers reported increases in 2018 MA enrollment and universally said they expect to see more of the same in that market this year. AM Best analyst noted MA "is likely to remain the main source of growth for the health insurance industry in the near term."
Humana, now second in MA members behind UnitedHealth, said it expects to see enrollment grow 13% in 2019 by an additional 400,000 members. UnitedHealth itself saw membership increase 11.6% for the year. Anthem, which has been ramping up its MA footprint, saw nearly 35% growth between 2017 and 2018.
In its analysis, AM Best found that MA premiums have more than doubled in the past decade, reaching $200 billion in 2017 with a growth rate of more than 7% in last two years of that span. It noted, however, that more reliance on MA revenue puts payers at greater risk to program changes and compliance requirements from CMS.
The market is becoming more competitive, with Anthem and Aetna in particular expanding their offerings. To differentiate themselves in the more crowded arena, plans will consider offering products tailored to particular conditions, improving star ratings and offering new supplemental benefits, Andrew Kadar, managing director at L.E.K. Consulting, told Healthcare Dive.
Still, MA "is a rising tide that in large part should lift all boats," he said, adding that the program is "on the right side of the healthcare cost curve and should continue to receive bipartisan support for expansion."
Part of the growth opportunity was sparked in April, when CMS allowed plans to offer nonmedical benefits like meal delivery and transportation assistance. That rule went into effect at the beginning of this year, but Kadar said many payers didn't have enough time to incorporate such new offerings into their 2019 plans. "It will be very interesting to see how plans' 2020 offerings emerge," he said.
Individual market shines for some
Improved profitability in the individual market should continue this year, although margins will likely edge downward, AM Best said. "Underwriting profitability has improved, driven largely by the turnaround in the individual segment owing to health insurers' initiatives to improve operating performance, as well as lower than expected medical cost trends," analysts wrote.
Fears of unstable risk pools as a result of elimination of the ACA's individual mandate penalty and expanded access to non ACA-compliant plans have largely not yet been borne out. Payers have managed to turn a profit in the exchanges through tactics like silver loading and because of prior years' hefty premium increases. State reinsurance programs, where enacted, have also helped.
Centene in particular touted its success in offering ACA plans during its most recent financial results presentation. In 2018, the payer’s exchange membership reached 1.5 million, contributing to about one-sixth of the company's overall revenue. "While there has been chatter about possible disruption to the exchanges, individuals like to have an insurance card with comprehensive coverage," Centene CEO Michael Neidorff told investors.
Political pressure, provider consolidation loom
Relatively stability this year will most likely be the calm before the storm, Abrams predicted.
"This is their big opportunity to get ready for it, to create more value for employers and for patients than they historically have created in order to present better choices," he said.
Increased attention on the 2020 presidential race is likely to put pressure on all actors in the healthcare industry to find ways to lower out-of-pocket costs and address festering patient frustrations, he said. Several high-profile candidates have released some form of a Medicare for all plan, a model the payer lobby strongly opposes (along with hospital groups). There is also increased attention on surprise billing and bipartisan attempts to tackle federal legislation to ban the practice.
Meanwhile, more consolidation in the provider sector will inevitably increase prices, particularly for high-margin procedures now migrating to alternative care settings. "They're going to need to replace that revenue from someplace, so they’re under tremendous pressure," Abrams said.
Also looming is the growing trend of employers, including major brands like Walmart and Apple, sidestepping insurers entirely to contract directly with providers (sometimes through on-site clinics), and providers getting into the payer game themselves. The Amazon-J.P. Morgan-Berkshire Hathaway joint venture is also still ramping up with employee costs as the target, he said.
AM Best echoed the sentiment that the writing may be on the wall. "Health insurers are aware that these trends will not last forever, however, and they understand that they need to remain vigilant and stay apprised of emerging issues and cognizant of rising cost trends and utilization," analysts wrote.