Medica CEO John Naylor said expanding to Iowa, Nebraska and Kansas was, “Risky, but it was the right thing to do.” (Vince Tuss/The Minnesota Star Tribune)

In spring 2017, as health insurers across the country were fleeing new health exchange markets due to mounting financial losses, Minnetonka-based Medica stayed the course.

Despite talk at the time that markets under the Affordable Care Act (ACA) were so troubled that even having a monopoly could be a bad thing, Medica opted to remain as the only carrier selling coverage for 2018 on the health exchanges in Iowa and Nebraska.

Two years later, the business decision is looking pretty good.

Regulatory filings this spring show Medica saw about $125 million in operating income last year across the two states, part of an emerging story where insurers that weathered the storm during the ACA's early years are now starting to make money.

"2018 is the first year where insurers are broadly earning a profit on the individual market under the ACA," said Larry Levitt, a senior vice president with the California-based Kaiser Family Foundation, which researches health insurance markets.

"No one sheds tears for insurance companies, but the ACA is built on the idea of a competitive private insurance market," Levitt said. "You can't have that unless insurers are making money."

The federal Affordable Care Act brought sweeping changes to the market where individuals buy health insurance.

It's always been a small slice of the health insurance world, since most people are covered through employer or government plans. But the market for individual coverage has been particularly important for self-employed people as well as those going through transitions such as a job change.

The ACA prohibited health insurers from denying coverage to individuals based on pre-existing health problems. It also created tax credits for people at certain income levels to reduce out-of-pocket spending on premiums. Finally, the law created new health insurance exchanges, which are government-run websites where shoppers can both buy coverage and qualify for the tax credits.

When the health law got rolling in 2014, many health insurers saw the changes as an opportunity to gain market share. But many started pulling back by 2016 as financial losses grew.

Medica at the time was facing the prospect of more competition in Minnesota, said John Naylor, the chief executive of Medica. By that point, it was clear that a long-delayed change in the state's Medicare market was finally coming, with the elimination of Medicare Cost health plans likely drawing new rivals. So, with about 2,000 employees and contractors, Medica sought to secure its future with growth in other states, Naylor said.

In 2016, Medica expanded beyond its base in Minnesota, North Dakota and Wisconsin by offering products on the government-run exchanges in Iowa and Nebraska. For 2017, the insurer added Kansas.

A Star Tribune analysis of regulatory filings shows that Medica during the first three years of the ACA lost about $85 million in the individual market on about $518 million in revenue. Even as losses continued in 2017, the insurance company didn't ditch its plan.

"Risky, but it was the right thing to do," Naylor said.

Medica stood out during spring 2017 as one of the few health insurers that agreed to stay for the following year in counties that otherwise were abandoned by all other carriers, said Katherine Hempstead, a researcher who follows the ACA markets for the New Jersey-based Robert Wood Johnson Foundation.

The share of counties in the U.S. with just one health insurer surged from 5% in 2016 to 33% in 2017, Hempstead said. In 2018, it jumped to 50%. Consumers access ACA tax credits by purchasing individual coverage from a private insurer, so there were concerns consumers in some counties wouldn't be able to tap subsidies due to a lack of participation by private insurers.

"I think that's one of the reasons for the revitalization of the idea of the 'public option,' " Hempstead said, referring to an idea floated by President Barack Obama while developing the ACA that the government should offer a health plan that competed on the exchanges against private coverage.

"People started to say: Well, gee, what would you do if you had a completely bare county?" she said. "It never came to pass because various things got worked out in all these different states. … Medica played a roll, too."

Last year, Medica's individual market enrollment across its six states grew from 94,000 people to more than 168,000 enrollees, due largely to growth in Iowa and Nebraska. In 2018, Medica saw an operating profit in the individual market overall, with Kansas being the only state where the carrier saw a loss. The results drove overall net income at Medica of $300 million last year on $4.4 billion in revenue — its best annual results in five years.

The individual market was better from a business perspective, Naylor said, because the population seeking care stabilized along with their financial risk. He also credited cooperative agreements between Medica and health care systems in Iowa and Nebraska to coordinate care for patients in ways that better manage costs.

Another factor is that insurers, in general, hiked premiums last year, said Levitt of the Kaiser Family Foundation. In Iowa, for example, federal data show Medica increased individual market premiums an average of anywhere from 44% to 57%.

"In many cases, insurers increased premiums so much in 2018 that they just — they didn't need further increases in 2019," Levitt said. "So, on average, premiums actually fell a bit in 2019 and were generally quite stable."

"What I think some insurers have found is that being a monopoly does allow you to more easily increase premiums and restore profitability," he said. "And we certainly have seen premiums rise more in areas with limited competition, particularly in rural areas."

Medica's margin in the market last year was about 10%, which is "very strong," said Deep Banerjee, a director at S&P Global Ratings. He added: "We would expect a moderation in rate hikes going forward and margins for the longer term to be lower than what we saw in 2018."

This year, Medica remains the only carrier selling health exchange coverage in Nebraska. In Iowa, there's now a second health insurer in the market. Medica has expanded for 2019 into part of Missouri and all of Oklahoma, as well.

Naylor, the CEO, said his company doesn't plan to enter new states for the individual market business in 2020. Instead, Medica expects to expand its Medicare business in some of the new states beyond Minnesota.

"We are very focused right now on making sure in those states that we're in, that we're serving them well," Naylor said. "Medicare is next. We did enter a few counties in [2019] in Nebraska and Iowa, but we will be entering many more counties with more products in 2020."

Christopher Snowbeck • 612-673-4744 Twitter: @chrissnowbeck