It's easy to think the nation's entire health insurance market is paralyzed by the nasty debate over Obamacare in Washington. But, while Congress battled over health reform this spring, the nation's largest health insurers racked up strong profits in the second quarter thanks partly to less exposure to the Affordable Care Act marketplaces.
Combined, the nation's top six health insurers reported $6 billion in adjusted profits for the second quarter. That's up more about 29 percent from the same quarter a year ago — far outpacing the overall S&P 500 health care sector's growth of 8.5 percent for the quarter, according to Thomson Reuters I/B/E/S data.
"A lot of the companies have downsized their exposure to the public exchanges," said health care equity analyst A.J. Rice, a managing director at UBS. "The core business, which is providing coverage to large and mid-sized employers... and the established government programs, Medicare Advantage and Medicaid managed care, have all done well."
Aetna, Humana and Cigna all saw adjusted earnings rise more than 45 percent from the year ago quarter, despite the fact that they continue to experience losses on Obamacare individual plans. Centene and UnitedHealth Group's adjusted profits were up roughly 25 percent from a year ago; Anthem was the laggard, with its earnings up just 2 percent.
The strong earnings are driving share gains, with all six of the top insurers' stocks hitting all-time highs this summer. The S&P 500 Managed Care sector is up 25 percent year to date.
What's driving insurer profits?
One major tailwind has been their ability to control medical costs. Most see costs rising in the mid-single digit range again this year. Cigna, the nation's fifth largest health insurer, said that much of that is being driven by the changes in plan design in the large employer market, which covers nearly 180 million Americans.
"They're seeing the benefit of this lower medical cost trend for their respective portfolio based upon the actions we're driving and continuing to drive for them," said Cigna CEO David Cordani on the company's second-quarter conference call. Though, Cordani noted that even within the individual exchange business, medical costs growth is trending better than the company expected.
Analysts say that increasing use of high deductible plans is helping rein in medical spending, in part by driving down the use of hospital emergency rooms. A number of the hospital providers reported lower volumes this quarter.
"It's not so much that (insurers are) getting great concession from hospitals," explained Rice. "Employees have much more upfront costs... and maybe they're taking a look at some utilization."
The Medicaid and Medicare markets are increasingly driving insurer topline growth, and that is where the plans are setting their sights on expansion. Aetna now derives more than half of its revenue from government plans, and after abandoning its merger deal with Humana, the insurer is focused on growing its Medicare Advantage market share on its own in 2018 and 2019.
"The general trend is growing the portion of health care claims that are directly or indirectly paid by the federal government," said health care ratings analyst Deep Banerjee, a director at S&P Global Ratings.
Beyond the appeal of the growing number of baby boomers aging into Medicare, Banerjee says the government health programs represent mature, more predictable markets for the large insurers, than the three-year old Obamacare program.
"If you look at Medicare Advantage, it's a public-private partnership," said Banerjee. "Even with a single payer in a public-private partnership, insurance companies are very involved in managing the costs, and actually running the program for the state or the federal government."
And as state and federal officials governments look to cut costs in programs like Medicaid, they are increasingly turning to the insurers.
That's not to say that the big insurers are not worried about the Obamacare market. Centene and Anthem are the largest national insurers on the exchanges, and both are still planning to offer plans next year, as is Cigna.
With 2018 open enrollment slated to begin in less than three months, large and small insurers are sweating whether the Trump administration will continue to pay cost-reduction subsidies for low-income enrollees and whether the health insurance tax will be reinstated next year. They are also watching to see whether a proposed bipartisan short-term stabilization plan floated by Tennessee Senator Lamar Alexander will gain support when Congress returns from its August recess.
Yet, even before the ACA, large insurers have had a tougher time with the individual market than regional players.
"This is a market they've never been able to break into very well," explained Rice, of UBS. "They've found it really tough to find the right model."
Centene is among the few large insurers that is starting to manage its exchanges plans profitably. Some Blue Cross insurers are also starting to see cost trends on the exchanges stabilize, after raising rates to account for the older, sicker risk pool in the last year.
The industry argues that with more permanent reinsurance funding to offset losses on the most expensive consumers, similar to the Medicare program, the individual exchanges could find their footing, and consumers could begin to see better pricing.
But, it is a work in progress," said Banerjee.
And for now, most large insurers are finding it pays to wait it out, when it comes to Obamacare.