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Thursday, May 14, 2015

Room for Premium Scrutiny? A Look at the Financial Health of Three Top Health Insurers

Joseph Ditré

Director of Enterprise and Innovation

By May 15 (or June 5 in some states), health insurance companies throughout the country must submit their proposed monthly premium rates for 2016 to state and/or federal regulators for review. By June 1 (or up to June 19 in some states), the public should be able to see whether any insurers are proposing rate increases of more than 10 percent. The public can comment on whether such proposed rates are affordable and justified. Our resources about the process for reviewing proposed premium rate increases—aka “rate review”—explain how the public can weigh in. As this season gets underway, we want to assure readers that many companies are doing well financially and thus consumers should speak up about the need for affordable premiums.

In 2014, health insurance companies and observers wondered how much their costs would increase as previously uninsured people gained coverage under the Affordable Care Act. Were the higher premiums justified? A year later, annual statements of health insurers show what expenses they actually faced in 2014. In time for rate review season, we analyzed how much money health insurers are earning. We found that the top insurers are in a strong financial position. Consequently, there is certainly room for scrutiny as insurers propose new premium prices for 2016.

We reviewed the 2014 annual statements of three large health insurance companies: Aetna and United Healthcare Insurance, both headquartered in Connecticut; and Anthem Insurance Company, headquartered in Indiana. Each of these companies is part of a larger “health care group” with a similar name. We chose to analyze these particular companies because they sell a lot of health insurance and operate in multiple states. 

Top health insurers remain profitable in 2014

All three companies earned more per premium dollar in 2014 than in 2013, including income from premiums and from investments. This is known as the “net income to net premium ratio.” The ratio for the companies we examined ranged from 6.05 percent for United Healthcare Insurance (meaning that United made about 6 cents per premium dollar after expenses) to 8.31 percent for Aetna (Aetna made more than 8 cents per premium dollar after expenses).  For-profit insurers typically earn a net income to net premium ratio between 3 percent and 5 percent.

Companies also fared well in 2014 based on profits from premiums alone, not including investments. We looked at each company’s “underwriting gain”—the profit earned per premium dollar after paying medical and administrative expenses and most taxes (but not federal income tax). Aetna and Anthem each had higher underwriting gains per premium dollar in 2014 than in 2013. Though United didn’t show an increase in this “net underwriting gain to net premium ratio,” it still gained more than 5 cents from each premium dollar collected. 

Health insurance companies have more than they need in capital and surplus

Finally, we looked at data on capital and surplus specifically. This helped us understand how much money these companies had built up in capital and surplus over the years compared to how much money they require to stay solvent. Insurance regulators use a formula to compute the “authorized control level” for a company—this is the point at which regulators would take control of a company that is not performing well. Regulators begin to watch a company when its capital falls below three times its authorized control level. At the end of 2014, each of these companies had adjusted capital well above these amounts—ranging from 4.6 (Anthem) to 6 times (Aetna) the authorized control level.

The picture these annual statements paint is consistent with other indicators of financial health. For instance, the Associated Press reports that several of the biggest health insurers are increasing their earnings expectations for 2015. Adding to the evidence that the industry is doing well financially, Investor’s Business Daily reports that UnitedHealth Groups’ profits “soared” in the first quarter of 2015, and that UnitedHealth “benefited from the expansion of its Affordable Care Act exchange offerings. 

Advocates should comment on proposed health insurance premium rates

When proposed rate filings are public in a few weeks, consumer advocates should dig in to see what premiums insurers are proposing for 2016. Consumers and their advocates want health insurers to remain strong and viable, but they also want a private insurance market that offers affordable premiums. We all need to weigh in to help ensure that consumers’ needs for affordable premiums also stay front and center.

How can you or your organization influence the rate review process in your state? Visit our rate review resource center to learn more.

Thanks to Rick Diamond, FSA, MAAA, for his review and assistance; and to Jingyi Chen, intern, for her research.