Post ACA Operating Margins: Health Systems and Health Plans

By Clive Riddle, September 14, 2018

Navigant this week released an eight-page report: Stiffening Headwinds Challenge Health Systems to Grow Smarter, that provides “an analysis of a three-year sample of the financial disclosures of 104 prominent health systems operating 47% of U.S. hospitals,” in which Navigant  “found broad-based and significant deterioration of operating earnings.”

Navigant reports that from 2015 to 2017:

• The average operating margin decline for analyzed systems was 38.7%. Not-for-profit system margins fell 34%, while for-profit margins fell 39%.
• 65% of systems experienced operating income declines totaling $6.8 billion, with the most significant reductions occurring in the U.S.’s fastest-growing regions: West/Southwest and South Central.
• At the root of these declines were multiyear reductions in the rate of topline operating revenue growth, which fell from 7% (2015 to 2016) to only 5.5% (2016 to 2017), and a failure to contain expenses in line with revenue deterioration. 

Navigant cites these drivers of earnings deterioration:

1. Weakening demand for such core hospital services as surgery and inpatient admissions, due in part to rising patient cost exposure from high-deductible health plans;
2. Deteriorating collection rates for private accounts in non-ACA expansion states;
3. Steady erosion in Medicare payment rates due to the ACA and the 2012 federal budget sequester; and
4. Failure of health system value-based insurance contracts to deliver sufficient patient volume to offset steep upfront payer discounts and significant hospital population health investments.

Meanwhile on the other side of the post-ACA equation, Mark Farrah Associates this week “released an analysis brief providing insights into mid-year profitability for commercial and government lines of health insurance business. MFA compared second quarter, year-over-year profitability for the Individual, Employer-Group, Medicare and managed Medicaid segments.”

They found that:

• At the end of second quarter 2018, the average medical expense ratio for the Individual segment was 70.8%, as compared to 77.2% the previous year.
• Growth in premiums pushed the average medical expense ratio for the Employer-Group segment down to 80.9% for 2Q18 from 81.8% in 2Q17.
• For Medicare Advantage, premium growth outpaced increases in medical expenses pushing the medical expense ratio down to 85.3% from 86.1% in 2Q17.
• 2.9% increase in premiums per member per month pushed the medical expense ratio for Managed Medicaid down to 88.6% from 91.0% in 2Q17.

Mark Farrah Associates concludes the current outlook is better than the one Navigant finds for health systems: “At the mid-year point, all four health care segments are signifying improved profitability for health insurers over 2017.  The most significant change is once again in the Individual segment showing improvement over 2017, which ended up being a profitable year for the segment overall.  While this analysis of mid-year segment performance sheds light upon profitability trends for 2018, it’s a wait and see proposition until final financial results are revealed in spring of 2019.”