Big growth through the MNsure exchange in 2014 contributed to big financial losses last year for PreferredOne, according to financial results filed by the Golden Valley-based health insurer on Monday.
PreferredOne's insurance division posted an overall loss of about $20.9 million last year, according to a regulatory filing, and company officials said the results were driven by about $139 million in losses in the individual market.
The insurer offered some of the lowest premiums in the nation during 2014, but ultimately left the MNsure exchange after concluding the individual market business wasn't sustainable.
After the wild ride, company officials believe the health insurer is on a path to recovery due to a huge reduction in individual market membership.
"We made some hard decisions in 2014, and we feel that those have put us on a track for a stable and favorable financial outlook for 2015," said Paul Geiwitz, who was named interim chief executive at PreferredOne with the retirement of longtime CEO Marcus Merz.
PreferredOne made a big splash in 2014 through MNsure, one of the new marketplaces created by the federal Affordable Care Act for people who buy health insurance for themselves outside of employer groups.
With the low premiums, PreferredOne garnered more than half the business on MNsure, even though the company previously had been a small player in the individual market.
Membership ballooned from about 14,000 people in 2013 to 83,000 people last year. Company officials have pointed out, however, that most of those sign-ups came outside the MNsure exchange.
Individual market losses mounted throughout 2014. PreferredOne believes it attracted a large number of people previously insured through the state's high-risk pool for people with medical problems that previously prevented them from getting insurance.
"The associated claims and risk with that was just too great," said Mike Umland, the company's chief financial officer.
So, PreferredOne adopted a strategy to reduce membership. In September, PreferredOne said it would not return to MNsure for 2015. In October, the company announced that individual market premiums would increase by an average of 63 percent.
Finally, PreferredOne tightened its network of hospitals and doctors for subscribers in the Twin Cities metro. The end result: Individual market enrollment plummeted to about 8,000 people this year — a decline of about 75,000, Umland said.
"The 75,000 members are out into the rest of the market," he said. "Now, it's elsewhere — it's not with PreferredOne Insurance Company."
The filing with regulators Monday did not include financial results for PreferredOne's health maintenance organization, or for its parent company, PreferredOne Administrative Services.
The $20.9 million net loss for all products in the insurance division came on revenue of about $430.2 million.
The parent company is owned by Fairview Health Services, North Memorial Health Care and a doctors group called PreferredOne Physician Associates.
With the surge in membership last year as well as financial losses, the insurer turned to its owners for additional capital, including a loan of $18.75 million from Fairview and a loan of $6.25 million from North Memorial.
The insurance company division also drew down $14 million in capital from the parent company. Steve Peterson, a company spokesman, said the funds came from accumulated earnings over a period of time.
PreferredOne expects to receive $112.4 million from risk-sharing programs that are part of the federal health law, Umland said, with payments expected in September and October. To finance the cost of health insurance claims in the meantime, PreferredOne took out a $40 million bank line of credit late last year, Umland said, with repayment planned for this year's fourth quarter.
The reliance on risk-sharing programs is an example of the "moral hazard" created by the health law for insurance companies, said Roger Feldman, a health insurance expert at the University of Minnesota.
"There was no downside of underpricing as long as the government was going to come and bail you out," Feldman said. "It certainly transferred money from the government to a few policyholders in Minnesota. But the government had to raise that money."
The risk-sharing programs are funded through a combination of premium taxes and financial transfers among health insurers. With all the unknowns surrounding how to set premiums during the first year of major health law reforms, the programs were needed for insurers, argued Clare Krusing, a spokeswoman for America's Health Insurance Plans, a trade group.
In December, credit rating agency A.M. Best lowered its outlook for PreferredOne due in part to the health insurer's troubled business in the individual market. But Umland, the chief financial officer, argued against a negative impression for the insurer's overall finances.
"We're in solid financial position," Umland said. "We're going to be fine."