Insurers cite higher-than-expected utilization but utilization is flat

As the major insurers reported their second-quarter financial results at the end of last month, a theme emerged: higher-than-expected costs driven in part by higher-than-expected utilization. 

But Hal Andrews, president and CEO of Trilliant Health, has been reviewing the data – lots of it – and has found no evidence of an increase in utilization of healthcare services on a national scale. What’s more, he said, is that utilization by Medicare fee-for-service beneficiaries has been flat or on the decline over the past five years for hospital inpatient, hospital outpatient, skilled nursing, inpatient rehabilitation and home health – typically the most resource-intensive and expensive types of healthcare utilization.

The issue is not that utilization is increasing per se, but that it’s increasing more than insurers projected, said Andrews. 

“There are almost no indicators that healthcare services utilization is increasing more than 1% year-over-year, which is different than whether utilization is increasing more than insurers projected for 2025, particularly those with exposure to Medicaid and ACA marketplace exchange plans,” he said. “The Q2 results for several insurers suggest a short-term issue with actuarial projections, which can and will be fixed through a significant increase in premiums for 2026.”

In fact, a recent KFF analysis projected that Affordable Care Act premiums are expected to rise an average of 18% in 2026. Higher medical utilization was one of the reasons cited by insurers, as well as the general market factors of increasing labor costs and inflation.

One of the biggest factors in the proposed rate increases is the expected expiration of the enhanced premium tax credit at the end of this year, unless Congress acts. The tax credits were put into place when the ACA was signed into law in 2010, but President Biden, through the Inflation Reduction Act, expanded and enhanced the tax credits that lowered monthly premiums.

The end of enhanced tax credits would lead to out-of-pocket premiums for ACA marketplace enrollees increasing by an average of more than 75%, KFF said. Because of this, insurers are expecting healthier enrollees to drop coverage, which would lead to higher premiums.

Andrews said potential extension of the premium tax credits beyond 2025 is a wildcard. But if there’s a consistent theme coming out of the insurers’ earnings calls, it’s that utilization of healthcare services by Medicaid and ACA enrollees is higher than expected.

“While the insurers don’t mention it, most disinterested and all cynical observers would wonder whether some of the earnings warnings are tied to recent revelations of ‘dual enrollees’ – not ‘dual eligibles’ – in Medicaid and Medicare Advantage, which theoretically represent as much as 100% gross margin for one of the multiple plans in which they are enrolled,” said Andrews.

The Centers for Medicare and Medicaid Services recently determined that about 2.8 million Americans are “either enrolled in Medicaid or the Children’s Health Insurance Program (CHIP) in multiple states or simultaneously enrolled in both Medicaid/CHIP and a subsidized Affordable Care Act (ACA) Exchange plan.” 

Andrews also said there are reports of improper enrollment in ACA plans, “with more enrollees in certain income brackets than the maximum number of potential enrollees within those brackets, particularly the lowest income level bracket with the highest subsidy.”

Medicaid redeterminations may be playing a factor in insurers’ financial results, he said. Statutory redeterminations were suspended from March 2020 through March 2023 due to the COVD-19 public health emergency. Full eligibility redeterminations resumed in April 2023 and will continue through the end of this year. 

“It is surprising that the health insurers are only now reporting material financial impacts of the redetermination process,” said Andrews.

The disenrollment of even a small number of “dual enrollees” in either Medicare or Medicare Advantage could partially explain insurers’ financial performance, he said. 

“For every ‘dual enrollee’ that was accessing benefits exclusively through ‘Insurer A,’ then ‘Insurer B’ was not only recognizing a high profit margin but a lower-than-expected utilization rate; in turn, the loss of each such ‘dual enrollee’ from Insurer B automatically increases the morbidity of Insurer B’s remaining membership,” said Andrews. “To the extent that Insurer B’s projected utilization for 2025 was based in part on low-to-zero utilization by tens of thousands of ‘dual enrollees’ in 2023 and 2024, it is obvious how the loss of those ‘dual enrollees’ would cause the utilization rate per capita to increase, even if actual utilization did not.”

Andrews noticed one other trend among insurers at the close of this year’s second fiscal quarter.

“Notably,” he said about utilization, “each has been remarkably consistent in not sharing actual numbers.”