As Iowa employers and health insurers put the first quarter of 2015 in the rearview mirror, both are still plagued with uncertainty around the Affordable Care Act’s requirements and the increasingly high costs of offering employer-sponsored health coverage. 

The past year ended on an unsettling note with news that CoOportunity Health was insolvent, and by late January the cooperative was ordered into liquidation, which sent many small employers scrambling to secure coverage. 

Add to that the angst around the anticipated ruling by the U.S. Supreme Court in the King v. Burwell case, the latest challenge to the Affordable Care Act. A ruling in favor of the plaintiffs would nullify the federal subsidies that are a critical component in bringing down the cost of health insurance for policies purchased on the online federal Marketplace.

Last year in Iowa, premiums increased an average of 8 to 9 percent for small groups and by approximately 5 to 6 percent on average for large groups, according to an annual statewide survey conducted by David P. Lind Benchmark. However, many companies experienced double-digit swings in premiums. 

At the same time, employers are concerned about the potential costs this year of additional reporting requirements, as well as the “Cadillac” tax on overly generous health plans that begins in 2018, said Steve Gooding, president of the Benefits Division at Reynolds & Reynolds Inc.

“My customers are feeling the pain,” Gooding said. “And the employees that are not getting big pay raises (as a result) are feeling the pain,” he said. “When you look at average premiums – about $500 to $600 per month – the average employee can’t afford that.” 

Lori Wiederin, a senior vice president with Holmes Murphy & Associates Inc., said it became a difficult year mainly because of CoOportunity unexpectedly going out of business. 

“A lot of employers had to make a change quickly,” she said. “And compared with the premiums they had with CoOportunity, what they went to were pretty sizeable increases.” 

It was an equally challenging year for Wellmark Blue Cross and Blue Shield, which experienced an underwriting loss for 2014, its first since 2009. 

For 2014, Wellmark Inc., which offers preferred provider organization (PPO) coverage, reported net income of $15.4 million, about one one-tenth the $150.4 million net income it had in 2013. The dip in earnings was due in large part to higher-than-expected claims costs from an influx of less-healthy people due to the Affordable Care Act, coupled with additional infrastructure and technology investments made by the insurer. 

Net income also dropped sharply for Wellmark’s health maintenance organization, Wellmark Health Plan of Iowa Inc., which posted net income of $10.7 million versus $26.5 million the previous year.  

The second and third-largest insurers in Iowa by market share behind Wellmark – UnitedHealth Group and Conventry Healthcare – each cover less than a quarter of the small and large-group markets in the state. Breakouts of Iowa financials were unavailable for the two companies, which are among the largest insurers nationally.

Both UnitedHealth Group and Aetna Inc., which last year bought Coventry, have increased earnings in the past year. UnitedHealth Group reported 2014 operating earnings of $10.3 billion – a 7.3 percent increase from 2013 – despite a $1 billion negative effect on earnings from the Affordable Care Act. Aetna had operating earnings of $2.4 billion in its health care segment, up from $2.3 billion in 2013. 

Wellmark’s bottom line

Low margins, riskier members

Though 2014 was a tough year on an operating basis, Wellmark is on solid ground financially, said David Brown, the company’s chief financial officer.

“We price to such low margins that we don’t have to be very far off on our benefit expense assumptions in order to lose a little bit of money,” he said. “In the giant scheme of things we still made money on a net basis, so I feel very comfortable in terms of our financial security. If you look at a company like CoOportunity, all they had was this individual and small group market that really struggled. They didn’t have the ballast of the large group market that could offset some of the losses in the individual market.” 

This year could also prove to be challenging, Brown said, given increases in medical claims costs, referred to in the industry as “trend.”  

“I do not expect it to be a year with very large profitability for Wellmark, but it’s still early to project,” he said. The increase in trend, “really started in the second half of 2014, and we’re continuing to see upward movement in trend in early 2015, which definitely gives me pause. So 2015 may be a little bit of a tough year for us.” 

Any premium increase next year would be a response to higher claims costs, not a move to recoup past underwriting losses, Brown said. 

“There is no direct link between our earnings this year and how we price,” he said. “If we have a loss one year we don’t try to recoup that the next year in our pricing. But if (medical cost) trend is accelerating, the way we do pricing is we figure out what claims will be in the coming year, add to that administrative expense, taxes and fees and then a small margin. So indirectly, if trend is worse than expected, it can lead to losses this year, but higher premiums next year.” 

Some of the larger health carriers may have fared better financially due in part to having substantial non-health businesses that aren’t exposed to health risks, such as UnitedHealth Group’s Optum subsidiary. “I think those businesses are helping their earnings, whereas we really focus on the core of providing health insurance,” he said. 

For Wellmark, the biggest financial impact under the Affordable Care Act so far has come in the individual market, from insuring new members who may be getting coverage for the first time under ACA-compliant policies, Brown said. 

“We had expected they would be riskier than our average member, and we kind of priced accordingly,” he said. “What we found was that we were correct as to direction, but wrong as to magnitude. They have been riskier than our general population, but actually much more so than we had thought. Therefore, we’re not doing very well financially with that segment because we hadn’t priced high enough.” 

Under the health insurer fee imposed by the Affordable Care Act, Wellmark last year paid about $40 million based on its Iowa and South Dakota members, which it passed through entirely to its members. However, because the fees aren’t tax-deductible by insurers, the fees still affected Wellmark’s bottom line. 

“It was definitely a factor because it affects our tax rate in a meaningful way,” Brown said. “The bigger factor was that we lost money the old-fashioned way – our claims expense was higher than expected, and most of that occurred within the individual market. Part of it is the ACA-compliant portion of members, but even in the non-ACA portion we have seen claims rising quicker than expected in the past year.”

Insurers are also subject to what are known as the “3 Rs,” a complex set of computations aimed at leveling the playing field for companies as the Affordable Care Act is phased in. On balance, Wellmark felt relatively little impact from those provisions, one of which did not apply because it did not sell policies through the federally facilitated marketplace for Iowa. The financial effect of another of the Rs, called the risk adjustment, won’t be determined until later this year, Brown said. 

“One of the challenges we have is getting pricing correct,” he said. “We as a business price at a very low margin – zero to 3 percent. Right now my team is working on pricing for 2016 products. We don’t have much data from 2015 yet, so we’re basically having to use 2014 data to price for two years later. You’re going to get that wrong sometimes; it’s hard to estimate the future that way.”

How Market Share has changed

Wellmark estimates it has picked up about 26,000 additional members in Iowa as a result of the Affordable Care Act provisions since the law went into effect, despite its decision to stay off Healthcare.gov, the federally facilitated online marketplace. 

Plenty of individuals have been signing up for coverage through Wellmark’s website or through brokers, however. 

“The perfect example would be someone with income high enough that they’re not eligible for the government subsidies, but didn’t have insurance and decided to get it now, either because they were concerned about the mandate and didn’t want to pay the penalty or they had serious health issues and didn’t feel like they could get coverage, and now they know they can,” Brown said. “So those people are going to sign up for insurance whether they get a subsidy or not. And they can get coverage directly from a broker or through our website; they don’t have to go through Healthcare.gov.” 

Another reason for the influx of new members could be that small employers are deciding to discontinue group coverage, Brown said. 

“Whereas in the past (an employer) may not have dropped coverage because workers wouldn’t be able to get other coverage, now they say, ‘I can drop my employees because they’ll still have the ability to get coverage.’ So we may have gotten some of those folks also.” 

Additionally, Wellmark picked up “a bunch” of former CoOportunity members in the last couple of months as most of those members fled the failed insurer. Many CoOportunity members with individual coverage were able to find subsidized coverage through the marketplace. “However, in the small-group market, we did get a fair amount of their small-group business,” Brown said. 

Gooding believes that Wellmark has picked up a substantial increase in Iowa customers in the past two years, moving from about 70 percent market share to more than 80 percent, in his estimation. 

“Wellmark is a great partner and we do a ton of business with them, but it would be nice to see other options,” Gooding said. “As a broker, we would love to see more competition,” he said. “Aetna stepping up to buy Coventry has been a wonderful thing. But we need more competition in this market. Losing CoOportunity has been a heartbreak for us; it really hurt the broker market.” 

With Aetna picking up Coventry in the Iowa market, “we’re anxious to see how competitive they’re going to be in the marketplace,” Wiederin said. “Any time there’s a new competitor in the marketplace – a new name and new philosophy – it’s always intriguing for people to check it out. Aetna has a different underwriting and medical management philosophy, so it will be different than what Coventry was.” 

Q&A with David Brown, CFO of Wellmark

How much has Wellmark paid to the Iowa guaranty fund for the CoOportunity failure? 
We’ve already made a payment — $27,285,000 – to cover losses from CoOportunity. We don’t expect to get any further assessments, so we think we’ve had the impact already. 

How will that affect the company? 
We front the payment but then can take a deduction on our premium taxes for the next five years until that’s paid back. So at the end of the day, with the failure of an insurance company like CoOportunity, it’s the taxpayer that ends up paying. 

Will adding CoOportunity members increase costs a lot this year? 
It’s hard to know. On the individual side we haven’t picked up very many members, so I don’t think it will have much of an impact from our perspective. In small group, where we have added members, I don’t anticipate it will have much of an impact, either. “We don’t have a reason to believe that CoOportunity’s members are (riskier). Right now our assumption is it won’t be a meaningful impact from adding their membership. 

Overall, did 2014 have a big effect on reserve levels? 
For Wellmark Inc., our surplus was down a bit, but not much — about $34 million – which is a pretty small percentage. If you rounded it to the nearest hundred million, you wouldn’t even notice it — it’s still $1.4 billion. The income from an underwriting basis was negative but our net income was actually positive because of investment returns. So that didn’t cause reserves to go down. The biggest factor in the reduction in reserves was a change in discount rates for accounting for our employee pension liability. We knew our reserves were at a level that were healthy enough that we could make some investments that we would fund out of our reserves. That, coupled with the accounting adjustments, caused the slight decrease in surplus.

Wellmark to again forego marketplace in 2016

Wellmark has declined to participate in the federally facilitated online marketplace, or exchange, for the past two years, and given the pending U.S. Supreme Court decision in King v. Burwell, the company has opted to again wait on participating, the company announced last week. Executive Vice President Laura Jackson said the insurer doesn’t want to spend several million dollars to ramp up on the marketplace when the pending U.S. Supreme Court ruling on King v. Burwell could overturn the legality of federal subsidies.   By not being on the marketplace, Welmark will also be exempt from offering SHOP marketplace to small businesses next year.

What will the impact be on employers?

New reporting requirements could be costly 

Gooding said his agency explored every avenue it could for its clients during the open enrollment period this past fall. 

“It was enormous undertaking,” he said. “We looked at every customer and looked at every angle we could take in the market. The failure of CoOportunity was an enormous problem; we had customers who went into their program in December and then in January (CoOportunity) went under.” Most of those employers were small groups, and most ended up with a 10 to 12 percent additional premium increase. About 90 percent went back to Wellmark. 

For many small groups, “this has been a very expensive proposition,” Gooding said. “The only ones who have dodged it are the large employers who are able to be self-funded. We have plenty of plans in that range, and it’s been a win-win for them.” 

For 2015, employers are bracing for potential higher costs to comply with new reporting requirements for health insurance data, such as possibly having to outsource that task to third-party data management companies to compile the data needed for the new 1094 and 1095 reports. “We’re counseling our clients to remain calm, wait for the new requirements to come out, and they probably won’t even need a third party,” he said. 

An additional concern is the “Cadillac” tax that goes into effect in 2018 for health insurance plans with benefits that are deemed overly generous. Gooding noted that the vast majority of his clients won’t have that issue. Just a handful of employer groups, primarily school districts and municipalities, have very rich plans that could be subject to the tax, he said. 

Unquestionably, employers have been moving toward leaner health benefits, Gooding said. “The interesting dynamic has been no move by employers to just giving up insurance. From our employer base, it’s been less than 1 percent that have done that. They have appreciated the value of having group coverage versus going out on the market to individual plans.” 

A national survey conducted by Mercer LLC underscores the value employers place on group benefit plans. Fewer employers than ever say they are likely to terminate their health plans and send employees to the federal marketplace, according to the Mercer 2014 National Survey of Employer Sponsored Health Plans. Just 4 percent of large employers believe it is likely they will terminate, down from 6 percent in 2013. Among smaller employers, in 2014 the percentage of companies that said they would drop coverage within five years fell from 12 percent to just 6 percent in organizations with 200–499 employees, and from 23 percent to 16 percent among those with 50–199 employees.

The Mercer study offers an economic explanation for why most employers seem willing to accept increased costs. 

“Because relatively few working Americans would qualify for subsidies on the public exchange that would equal the typical subsidy provided in an employer plan, an employer that dropped coverage would need to significantly increase its employees’ pay to make them whole — and, unlike health plan contributions, those extra dollars would be taxed,” the study said. “With health care cost increases relatively low, most employers seem willing to accept the cost increases associated with health care reform rather than lose the advantages of employer-sponsored coverage.”

Continued uncertainty, high costs

“Overall, certainly from the carrier viewpoint, given the Affordable Care Act requirements over the past four or five years now, insurers have been sailing in uncharted waters,” said David Lind, principal of David P. Lind Benchmark in Clive. “A real big part of that, in addition to the uncertainty of health risks (from previously uninsured individuals now getting coverage), are the legal uncertainties. Not only does it affect the carriers, it affects employers when they’re trying to make decisions about what to do in the future. I believe employers want certainty in a time of continued political and legal chaos. They also want more simplicity from a law that’s written with a lot of complications.” 

According to Lind’s latest annual survey of Iowa companies released in October 2014, total premiums paid through employer plans — employer and employee contributions combined — have increased by about 35 percent in the past five years. On a combined basis, employer and employee contributions for single coverage in Iowa averaged nearly $6,000 for single coverage and nearly $15,000 for family coverage. 

Iowa’s smallest employers, those with 50 or fewer employees, saw rate adjustments from 7.7 percent to 9.9 percent on average, while rate increases for larger companies averaged between 4.7 and 5.7 percent, according to the survey. 

Though the rate of premium increases has moderated somewhat in the past couple of years, Lind said he anticipates further turbulence ahead for rates because the underlying factors that are driving up health care costs — primarily unhealthy lifestyles and a fragmented health care delivery system — have not been solved. 

“At least 30 percent of health care spending is wasted cost, and we’re paying that downstream,” Lind said. 

Wellmark’s Brown said a significant factor that has driven premium costs upward are skyrocketing prescription drug costs, particularly for specialty pharmaceuticals used to treat certain types of cancer. Some biologics, such as the new Hepatitis C drugs, which can cost as much as $80,000 to $100,000 per treatment, he said.  

“In the short term that can lead to some financial losses for us, and in the longer term it leads to higher premiums for our members, unfortunately” Brown said. 

Brown said that employer-based wellness programs and community health initiatives such as the Blue Zones program that his company sponsors seek to address the underlying health issues that drive up costs. 

“When you look at the employers that are doing wellness programs and are either offering incentives or requiring participation in some ways, I think we see some real positive impacts,” he said. “In the broader population, it’s much harder for us to impact that directly as much as employers can affect it with individuals. We have focused a lot on community health programs like Blue Zones, but it’s still in the very early stages.” Over time, programs such as Blue Zones should begin to curb health risk factors such as obesity and correspondingly slow the rise in medical costs, he said. 

“What we’re really excited about is the enthusiasm that has been shown in the communities around these community health initiatives and people’s excitement about the need to change.” 

For Wellmark, the uncertainties surrounding the Affordable Care Act are still substantial, Brown said. 

“There is just so much that’s unknown still, partly because of the legal challenges to it,” he said. “Let’s say the King v. Burwell case (is decided in favor of the plaintiffs); you could argue it puts the entire law at risk. Or a new administration could change things. There is still so much uncertainty and volatility around this.” 

What’s ahead: 

New reporting requirements 
Beginning next year, insurers and employers will be required for the first time under the Affordable Care Act to submit reports detailing how many employees were covered under health plans. The rules will apply to large employers, defined as those with an average of at least 50 full-time employees, but will also extend to some smaller businesses if they’re subsidiaries of larger companies. “Administratively, this is probably going to take them the most time when it comes to the health reform act,” Wiederin said. “It’s big. All of them are working with their payroll system or internally to see how they can track all this information to report in January 2016.”  

Change in small group definition 
For plan years beginning in 2016, the definition of small employer will expand from groups with 50 or fewer employees to include groups with 51-100 employees as well. The change will mean more restrictive rating rules for groups with 51-100 employees, as well as additional benefit and cost-sharing requirements. The more restrictive rating and benefit requirements could cause more groups sized 51-100 to self-insure, especially among those whose premiums would increase under the new rules, according to an issue brief published in March by the American Academy of Actuaries. 

‘Cadillac’ tax 
Beginning in 2018, employers who offer group health coverage face the so-called Cadillac tax provision of the Affordable Care Act, which will impose a 40 percent excise tax on the health benefits companies provide their workers above a certain threshold. The tax will apply to individual health benefits exceeding $10,200 for singles and $27,500 for families. For example, for family benefits worth $30,000, the tax would apply to the $2,500 that’s above the limit.

Gooding said the tax is not an issue for the vast majority of his clients. The likeliest employer groups to run afoul of the Cadillac tax are school districts and municipal governments, which tend to have very rich benefit plans, he said.