Managed Care and Financial Risks of Health Insurers Under PPACA

Abstract

Health care insurers have faced increased risks under the health care reform (PPACA) in the United States. By increasing the population of insureds, eliminating coverage caps, extending covered perils, and mandating minimum loss ratios, health care reform confronts insurers with the specter of potentially large financial risks. Many of these risks manifest through increases in health services utilization. Empirically, utilizations have increased - especially for the Medicaid population -, not only absolutely but also per capita. Insurers have a variety of tools to mitigate the financial impact of these heightened risks, including managed care, increases in capital and/or reductions in investment portfolio risk. Managed care is more effective with hospitalizations than with patient encounters with providers. This study examines how insurers are adapting their relationship between the financial management tools of capital and investment portfolio risk to PPACA-induced changes in two types of utilizations: patient encounters with providers (less subject to managed care) and hospitalizations (more subject to managed care) for four subpopulations: Medicaid, Medicare, Federal employees, and other comprehensive (employer and individual) programs. An innovative feature of the analysis is the use of semiparametric modeling to avoid the distortions imposed by traditional linear models. One surprising finding is that during the phase-in of PPACA, financial management tools largely decouple from utilization rates - becoming uncorrelated with them, and suggesting that the magnitude of the mitigation bears little relation to the magnitude of the risk. Since most enterprise risks are controlled for in the models, this raises questions about whether and how health insurers are managing the new risks.

Keywords: health insurance, managed care, capital, risk