If there's a word that sums up what 2017 was like for the health insurance industry, that word would be uncertainty.
The primary source of that disruption was President Donald Trump and the Republican-led Congress, which created countless headlines as they tried to unravel the Affordable Care Act. While the near-constant drama on Capitol Hill captivated the nation, it left insurers—which were still struggling to adjust to the healthcare law—on even more unstable footing.
But it wasn't just policy uncertainty that engulfed the insurance sector throughout 2017. Consolidation was also a major disrupter, as the industry saw two major insurer mergers collapse as well as a steady drumbeat of smaller-scale deals. Then the biggest deal of them all—CVS' bid to buy Aetna—rocked the boat even further.
Amid all the turmoil, however, it wasn't difficult to find bright spots for the industry. Medicare Advantage and Medicaid managed care business lines thrived as payers benefited from the government's increasing reliance on private firms to manage the public insurance programs.
And despite all the disruption, the ACA proved more difficult to uproot than many thought—offering a degree of relief to an industry that was bracing for the worst.
Read on for a more detailed look at the many story lines of 2017, and what we've learned from them.
Repealing the ACA is harder than it looks.
After seven years of pledging to repeal the Affordable Care Act "root and branch," Republicans finally got their chance after scoring major victories in the 2016 election. What they quickly learned, though, is that delivering on that campaign promise is much harder than it seems.
On the legislative side, the House voted in May to pass an ACA repeal-and-replacement bill known as the American Health Care Act. The Senate drew up its own bill—the Better Care Reconciliation Act—and set about trying to drum up enough votes for it even as opposition from industry groups gained steam.
The whole process reached its peak in late July, when the Senate began a marathon debate on a slew of different bills, including a "repeal-and-delay" measure called the Obamacare Repeal Reconciliation Act.
That bill failed to pass, but the most dramatic moment came around 2:00 a.m. on July 28, when Sen. John McCain, R-Ariz., struck the death blow to a "skinny repeal" bill by giving it a literal thumbs-down on the Senate floor.
Republicans weren't finished, however. In September, a measure drafted by GOP Senators Bill Cassidy and Lindsey Graham started to gain steam—and consequently, put a bipartisan ACA stabilization bill on the backburner. The Graham-Cassidy bill never came up for a vote, as Senate leaders failed to garner enough support for it, though its supporters were adamant that they'd eventually try again.
Despite all those failed attempts, however, Republicans have managed to repeal one major tenet of the ACA—the individual mandate. Though actuaries, health insurers and other industry organizations have warned that nixing the penalty for lacking insurance will destabilize the individual market, the GOP did just that in the tax bill that Congress passed in late December. President Donald Trump signed the bill on Dec 22.
Much can be done with the ‘power of the pen.’
While Congress was consumed with trying to pass laws to repeal the ACA, Trump and various federal agencies set about using their regulatory clout to unwind as much of the law as they could.
Perhaps one of the biggest moves came in October, when Trump announced that his administration would cut off cost-sharing reduction payments to insurers. The move followed months of speculation about how he would handle a previously filed appeal of a judge’s ruling that the subsidies were being illegally funded.
This month, the parties in that case reached a settlement, but the fight over CSRs is far from over. Not only are several states still involved in litigation seeking to reinstate the payments, but there’s been a bipartisan push in Congress to appropriate short-term funding for them.
Trump also used the “power of the pen” to issue an executive order that could have far-reaching consequences for the health insurance industry. The order directs federal agencies to expand the use of association health plans, employer-based health reimbursement arrangements and short-term health plans.
While Trump and his supporters argued such policies would increase choice for consumers, two prominent health insurer trade associations and other groups have warned that the order could create or expand alternative, parallel markets for health coverage that would ultimately raise premiums.
UnitedHealth, however, has indicated it might benefit from a rule extending the duration of short-term health plans.
The Trump administration also issued two rules that would allow a wider range of employers to opt out of the ACA’s contraceptive coverage mandate. The rules were quickly met with legal challenges, and in December, a suit filed by Pennsylvania and other filed by five additional states succeeded in getting a judge to temporarily block the new rules from being implemented.
Regarding ACA open enrollment, the administration cut sign-up season in half and drastically scaled back funding for outreach and advertising. Yet even with those two moves, nearly 9 million people enrolled in plans through Healthcare.gov—almost matching last year's sign-up total for the federal exchange.
Insurers—especially the big ones—are actually doing fine financially.
While much was made of the fact that many major health insurers pulled back from the ACA exchanges in 2017 due to heavy losses, the situation wasn’t as bleak as it seemed.
For example, a pair of analyses from the Kaiser Family Foundation—one issued in April, the other in October—found that after a rocky 2014 and 2015, individual market insurers are now on a path to reach pre-ACA levels of profitability.
A report from Standard & Poor’s came to a similar conclusion, saying many insurers are on track to break even in the exchange business and challenging the notion that the market is in a “death spiral.”
The next month, the agency upgraded its outlook for the health insurance industry from negative to stable, citing its heightened comfort that the sector’s business model and underlying financial profile will remain largely intact over the next 12 to 24 months.
However, an analysis from Deloitte pointed out that the experience of the largest health plans has been drastically different from that of other insurers. In fact, the 10 largest plans by revenue generated 92% of all the underwriting gains in the fully insured market in 2016—a finding researchers attributed in part to other plans’ heavy losses in the ACA-compliant market.
A recent Health Affairs study offered even further insights, finding that the amount of revenue that the “big five” commercial insurers took in from their Medicare and Medicaid businesses—which went from $92.5 billion in 2010 to $213.1 billion in 2016—helped offset the firms’ losses in the individual market. That trend, the study added, points to a “growing mutual dependence between public programs and private insurers.”
Mega-mergers are dead; long live M&A.
At the start of 2017, things were not looking good for health insurance mergers.
In late January, a federal judge ruled against Aetna’s proposed acquisition of Humana, siding with regulators’ argument that it would “substantially lessen” competition in the Medicare Advantage market. Less than a month later, another judge did the same for the Anthem-Cigna deal—in that case citing its effect in the national account market.
Aetna and Humana decided in mid-February to abandon their transaction, but in Anthem and Cigna’s case, the judge’s decision set off a months-long legal dispute between the companies over whether to appeal the ruling or terminate the contract. While Anthem was successful in compelling Cigna to honor their agreement, the companies lost the appeal anyway. They officially called it quits on their deal in mid-May.
Not surprisingly, the collapse of those deals had a chilling effect on major M&A in the industry—but it didn’t stop it entirely. Instead, insurers opted for smaller-scale deals aimed at adding new capabilities, reaching new geographies or expanding their market share in profitable business lines.
Anthem, for example, announced that it would acquire two different Medicare Advantage insurers that operate in Florida: America’s 1st Choice and HealthSun, and inked a deal with CVS to create an in-house pharmacy benefits manager for the insurer.
Centene, meanwhile, said it would acquire New York-based Fidelis Care, which serves Medicaid, ACA marketplace, Medicare and dual-eligible customers. And most recently, Humana announced plans to buy part of home-health and hospice giant Kindred Healthcare.
In fact, the success of UnitedHealth/Optum’s integrated PBM was likely one reason for CVS and Aetna to announce a deal even bigger than its ill-fated merger with Humana. In a transaction valued at $69 billion, the pharmacy giant will purchase the health insurer and “create a healthcare platform built around individuals,” as CVS CEO Larry Merlo put it.
While it’s still unclear if that deal will get a green light from federal regulators, it has already stirred speculation about whether it will have a ripple effect in the industry—setting off another round of consolidation in an already highly concentrated industry.