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The U.S. ACA Individual Market Showed Progress in 2016, But Still Needs Time To Mature

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox Energy demand impacts to linger in wake of Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Fast-moving Michael destroys gas demand across US Southeast

The U.S. ACA Individual Market Showed Progress in 2016, But Still Needs Time To Mature

The numbers are in. In line with S&P Global Ratings' forecast, 2016 was a marked improvement for most U.S. Blue Cross Blue Shield (Blues) insurers' operating performance in the Affordable Care Act (ACA) individual market. But target profitability is still a couple of years away.

Looking forward, we expect insurers, on average, to get close to break-even margins in this segment in 2017. But 2018 and beyond are still uncertain given potential legislative changes to the U.S. health insurance market and the pending legal battles over the cost-sharing reduction (CSR) subsidy. If the market continues unaffected, with a few fixes rather than an overhaul, we expect 2018, or Year 5 of the ACA individual market, to be one of gradual improvement with more insurers reporting positive (albeit low single-digit) margins. But if there are significant changes to the individual market, or if CSRs are made null and void, the market essentially has to restart with a new set of rules.


  • The U.S. ACA individual market shows signs of improvement, as most insurers' 2016 results were better than 2015 results.
  • But the market is still developing and will need a couple more years to reach target profitability.
  • 2016 results and the market enrollment so far in 2017 show that the ACA individual market is not in a "death spiral."
  • However, every time something new (and potentially disruptive) is thrown into the works, it impedes the individual market's path to stability.

Other than operating performance, a key area of focus for the individual market is insurers' participation in the ACA marketplace (exchanges). Based on recent exit announcements, states like Tennessee and Iowa may have counties with no insurer on the exchange in 2018. This issue may worsen if the uncertainty around market rules and subsidies isn't clarified sooner rather than later. Insurers need to file their initial rates and products for 2018 in May and June of this year. Having them decide without adequate information may result in either higher-than-expected premium rate increases, or a few insurers hesitating to remain in the market.

Improvement in 2016, But Target Margins Are Still a Couple of Years Away

As we have stated previously, we expect a five-year path to stability. 2016 was year 3. After starting on the wrong foot in 2014, and deteriorating further in 2015, we are seeing the first signs in 2016 that this market could be manageable for most health insurers. Other than a few exceptions like the Florida and New Jersey Blues, most Blue plans have struggled in this line of business. But the medical loss ratios (MLRs) for most Blues improved significantly in 2016. MLRs represent the percentage of premiums insurers pay out in claims. The weighted average MLR for the Blues included in our study was about 92% for full-year 2016, compared to 106% in 2015 and 102% in 2014.

Blues MLRs - Individual and Group Business Lines

On a gross profit/loss (before accounting for administrative cost) basis, an MLR below 100% indicates that the insurer had some money left over after paying medical claims. 2016 was the first year since the start of the exchanges that the Blues reported a gross profit (in aggregate) in the individual business line (see chart 2). But adding in administrative cost to get to underwriting profit/loss, most of the insurers (especially those with MLRs above 90%) would continue to report an underwriting loss. This means more time is needed for this market to mature before consistent underwriting profits are possible.

Gross Profit/Loss in the Individual Market

Our analysis of 2016 results and the market enrollment so far in 2017 shows that the ACA individual market is not in a "death spiral." But it isn't on a stable footing either. As a point of comparison, we looked at the employer-sponsored (group) insurance market. The group line of business, which continues to be the dominant segment for the industry, remains fairly steady for most diversified insurers. Both the MLRs and gross margins (see charts 1 and 3) in the group business are better and more consistent than those in the individual market. The obvious difference is scale or size of the risk pool. But the other difference is maturity of the risk pool. Although the individual risk pool will not achieve the scale of the group market, it will mature with time.

Gross Profit/Loss in the Group Market

Continued Improvement in 2017

Insurers have put in meaningful premium rate increases, along with product and network changes, for 2017. Besides correcting for morbidity risk, the pricing increases also attempt to cover for the end of the ACA reinsurance program. Unlike the risk corridor that failed to pay out as initially expected, the ACA reinsurance program proved fairly effective for insurers. Funded by reinsurance contributions by eligible insurers, the ACA reinsurance program paid out close to $16 billion for 2014 and 2015. The reinsurance program expires after 2016. We believe the continued pricing correction and network design changes, along with regulatory fine-tuning of ACA rules, will result in closer to break-even underwriting results, on average, for the individual market this year. But most will remain below their target profitability levels (low single-digit margins for the Blues) in 2017. It will take another year or two of continued improvements to get to that target.

The sharp rise in premium rates in 2017 didn't lead to a significant drop in enrollment, and perhaps a potential "death spiral." This is because of the stabilizing effect of ACA's income-based advanced premium tax credit (APTC). As per the Center for Medicare and Medicaid Services (CMS), the gross average monthly premiums (before APTC) for APTC-eligible enrollees increased more than 20% in 2017. But CMS noted that there was almost no year-over-year change in the net average premiums (post APTC). Over 80% of the enrollees on received an APTC linked to the actual price or market premium; so as premiums went up, so did their subsidies. This effectively hedged them against the sharp premium increase. There was a decline of 5% in 2017 enrollment when compared to 2016 open enrollment, but it could have been far worse if not for the APTC and CSR subsidies.

Pricing and Participation Uncertainty in 2018

As insurers continue to adjust their products and pricing, we expect some premium rate increase in 2018 as well. If it remains business as usual, we expect 2018 premiums to increase at a far lower clip than in 2017. Premium increases are common in the insurance space. Even the group market undergoes premium increases each year. But the scale of increase is generally smaller than what happened in the individual market in 2017.

If it is business as usual, we expect low single-digit year-over-year growth in membership/enrollees for 2018. As for insurer participation, we expect most counties in the U.S. to continue to see at least one insurer on the exchange in 2018. However, based on recent company announcements, certain counties may be left without any insurer on the exchange in 2018. We observed some correlation between insurer participation and Medicaid expansion. For example, four out of the five states (Alabama, Alaska, Oklahoma, South Carolina, and Wyoming) that have one insurer on the exchange in 2017 also don't have an expanded Medicaid program. Insurers also consider other factors when deciding to participate on an exchange, including population size, morbidity levels, and their own tolerance for volatility in earnings.

Any significant overhaul or increased uncertainty may lead to a different result than we have forecasted for 2017 and 2018. If the legal battle over CSRs isn't concluded soon, or if insurers don't have clear assurances that they will be paid for CSRs in 2018, they will have to make a decision on pricing and participation without adequate information. Additionally, the spotlight will be on the U.S. Dept. of Health and Human Services to continue implementing ACA in its current form until a different health insurance reform bill becomes law. Clarification on the CSR subsidy, enrollment outreach, and enforcement of special enrollment periods and the individual mandate will top the agenda for the future stability of the individual marketplace. If insurers are uneasy regarding the future of the market, they may have to decide between adding an "uncertainty buffer" to their pricing or--worst case--exiting the exchanges altogether.

A Fragile Market Needs Time to Stabilize

We view the individual market as being in the early stage of development, and therefore somewhat fragile. There was an individual market before 2014, but the current ACA individual market is only four years old and needs time to stabilize. Additionally, right from the start multiple external factors have disrupted this market, such as technical issues with the website in 2014, after-the-fact rule changes related to the grandmothered plans, altering the risk corridor to be budget-neutral, and the more recent CSR court case and potential for legislative overhaul. Every time something new (and potentially disruptive) is thrown into the works, it impedes the individual market's path to stability.

Blues Medical Loss Ratio For The Individual Market
(%) 2016 2015 2014 Total individual members (2016) Participating States

Health Care Service Corp

96.2 118.3 112.7 1,158,117 IL, MT, NM, OK, TX

GuideWell Mutual Holding Co.

75.2 84.0 94.3 748,988 FL

Blue Cross and Blue Shield of North Carolina

83.0 102.7 91.6 373,673 NC

Carefirst Inc.

97.7 103.3 98.0 308,702 DC, MD

Arkansas Blue Cross & Blue Shield

92.7 93.9 92.4 270,574 AR
Independence Health 94.3 97.0 94.5 261,218 PA
Horizon Healthcare Services 85.1 76.5 83.5 196,161 NJ

BlueCross BlueShield of Tennessee Inc.

101.4 122.6 117.9 194,995 TN

Highmark Inc.

102.8 133.8 122.7 173,028 PA, NJ

Blue Cross & Blue Shield of Alabama Inc.

98.4 120.2 102.1 164,307 AL

Louisiana Health Service & Indemnity Co. (d/b/a Blue Cross and Blue Shield of Louisiana)

94.9 102.0 97.6 147,963 LA

Blue Cross and Blue Shield of South Carolina

88.5 91.2 85.0 131,784 SC

Blue Cross & Blue Shield of Arizona Inc.

90.1 105.5 105.0 129,065 AZ

Blue Cross Blue Shield of Michigan

79.8 83.1 81.8 118,452 MI

Blue Cross & Blue Shield of Minnesota

113.2 134.7 122.4 102,434 MN

Premera Blue Cross

97.6 113.8 94.9 100,086 WA, OR
Cambia Health Solutions 89.3 94.5 104.7 99,909 OR, WA, UT, ID

Wellmark Group

97.5 101.9 94.5 95,587 IA

Blue Cross & Blue Shield Of Kansas City

98.7 104.7 109.1 94,222 MO

Blue Cross & Blue Shield of Kansas Inc.*

113.4 119.8 117.0 92,047 KS

Capital Blue Cross

107.1 104.6 94.9 85,900 PA

Blue Cross & Blue Shield of Massachusetts Group

107.6 104.9 95.8 81,802 MA

Blue Cross of Idaho Group

98.5 112.7 104.7 67,367 ID

Blue Cross & Blue Shield of Nebraska Inc.

107.5 114.7 109.6 56,921 NE
Mississippi Ins. 89.4 90.3 95.9 53,315 MS
Lifetime HlthCare 80.7 77.4 84.4 52,554 NY

Noridian Mutual Insurance Co. (d/b/a Blue Cross Blue Shield of North Dakota)

92.7 87.9 96.1 38,506 ND

Blue Cross & Blue Shield of Wyoming Inc.

102.1 90.2 83.2 32,377 WY

Blue Cross & Blue Shield of Vermont

95.4 95.4 104.5 28,751 VT

Blue Cross & Blue Shield of Rhode Island Inc.

90.2 88.7 90.0 27,340 RI

Hawaii Medical Service Assoc.

116.4 116.8 112.0 24,657 HI

HealthNow New York Inc.

99.1 79.4 75.2 10,499 NY

Blues with multiple entities have been grouped together based on available information. MLR calculated as amount incurred for provision of healthcare services / Health premium written. *One entity in the group has a life filing, for which we used earned instead of written premiums. Source: NAIC annual health statutory filings - Exhibit of premiums, enrollment & utilization, S&P Global Ratings research.

Additional Details

We focused on the Blues as a case study for our analysis. In most states, Blues have leading shares of their local individual markets and are participating on and off the exchanges. For Blues that have more than one legal entity, we combined the multiple entities where possible. We did not include the for-profit Blue plans that are part of the publicly traded Anthem Inc. group. Also, we did not include Blue Shield of California because statutory filing templates in California differ significantly from those in the remaining states.

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.