Certainty for hospitals and uncertainty for health insurers

Before the pandemic, hospitals and insurers were locked in bitter contract negotiations, as consumers became frustrated with the high costs of health insurance. Since then, the American Hospital Association estimates that hospitals and health systems will collectively lose $36.6 billion on COVID-19 hospitalizations, even after accounting for insurance reimbursements. In mid-March, hospitals and health systems canceled or postponed high-revenue non-emergency surgeries to prevent the spread of coronavirus and preserve capacity for expected coronavirus patients. To make matters worse, patients with non-COVID conditions are afraid to seek care, anecdotal reports of emergency room visits down 40 percent, and preventive cancer screenings down by almost one-half.

Overall, declines in costly health care services should translate into higher profits for health insurers.  Insurers reported that they saw the little financial impact from the COVID-19 pandemic in their first-quarter earnings reports, and they maintained their full-year 2020 earnings guidance. However, an analysis of 1,500 hospitals with 100+ beds estimates a 56 percent decline in patient volume between March 1 and April 15, amounting to revenue losses of $1.4 billion per day. Premiums are vastly exceeding medical spending.

In response, several for-profit insurers give money back to customers and cut upfront costs for care and prescriptions. For example, UnitedHealthcare announced that it is crediting between 5 percent and 20 percent of premium costs in June for a fully insured employer and individual health plans, which cover about 8 million people. It is no surprise that insurers would issue premium credits for these plans, given that the Affordable Care Act requires that the proportion of premiums allotted to administration, marketing and profit be capped at 20 percent, and any excess must be rebated to purchasers. Customers who bought individual plans in 2020 through healthcare.gov will receive rebate checks in 2021, which are likely to exceed $500. Employers receiving rebates are not required to share the bulk of those rebates with employees if the firm paid the majority of premium costs.

Self-funded plans cover 61 percent of workers with employer-provided insurance. Large employers tend to self-fund payments to health care providers and pay insurers to administer their programs. In this case, any savings from reduced non-COVID care in 2020 accrues to the employer, who has no obligation to share these savings with employees. Given that most employers are facing financial losses in the contracting economy, and high unemployment has vastly reduced the need to compete for workers, firms will feel less compelled to share premium savings with workers. Therefore, the majority of privately insured Americans will not share the premium savings from reduced healthcare spending during the pandemic.

Looking forward to 2021, insurers face unprecedented uncertainty in how to set premiums. Failure to develop a vaccine could lead to continued reluctance among consumers to seek elective care, dampening health care spending. But successful development and dissemination of a coronavirus vaccine would likely release significant pent-up demand for health care among consumers, which would dramatically drive up insurers’ costs. Health insurers, who are selling financial protection against uncertainty to others, are now facing some of the greatest uncertainty their industry has ever seen. I’m sure they prefer this future to the future of hospitals, who have already incurred billions in losses, that will burden them for years to come.

Vivian Ho is the Baker Institute Chair in Health Economics at Rice University and a professor at Baylor College of Medicine.