Outlook for Health Insurers Negative Due To Reform, Costs, Economy, Moody's Says

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Despite better than expected results in 2010, the outlook for the health insurance industry is negative as a result of the health care reform law, increasing health care costs, and the sluggish economy, Moody's Investors Service Inc. said Jan. 4 in a report.

“Our expectations for 2011 for the sector as a whole include lower earnings, flat-to-low membership growth, and strategies increasingly focused on diversification,” said the report, US Healthcare Insurers: Outlook Remains Negative.

During 2010, health insurers were required to provide additional benefits under the Patient Protection and Affordable Care Act (PPACA), and they were able to adjust premiums appropriately, the report said. However, in 2011, two key provisions of the law, the minimum medical loss ratio regulation and changes to Medicare Advantage reimbursement levels, could significantly affect insurers' financial results, the report said.

Moody's Investors Service is a wholly-owned credit rating agency subsidiary of Moody's Corp.

“The MLR regulations will, in effect, limit profitability in the individual and group insured segments, and changes to Medicare reimbursement could reduce both margins and membership,” said Stephen Zaharuk, senior vice president of the credit rating agency, in a press release. The rule requires insurers to spend at least 80 percent to 85 percent of premiums on medical claims or quality improvements, or refund the difference to policyholders beginning in 2012.

Under PPACA, the regulatory landscape for the next several years will bring more challenges, the report said. As a result, health insurers are seeking to diversify into areas not directly affected by the law and they are reassessing some of their marginal business lines.

While that could produce more favorable results in the longer term, “These are distractions from the management and growth of the business,” the report said. “In many respects, health care reform has forced companies into a defensive strategy mode compared to the aggressive growth and acquisition strategies followed a few years ago.”

Rate Increases.

Premium rate increases, which the Department of Health and Human Services would review for small group and individual insurance plans that exceed 10 percent under a proposed rule (see previous article), has become “a political issue,” the report said. “The actions we have seen during 2010 with respect to delays and denials of proposed rate actions have had more of a political spin than traditional regulatory oversight,” it said. “Our concern is that the review and approval process for health care insurers may become more politically driven, resulting in an over-burdensome process that could result in rates being delayed, denied or approved at lower/insufficient levels, thus hurting profitability,” it said.

In addition to regulatory challenges, languishing job growth and rising health care costs are forcing some employers and individuals to forgo insurance due to rising premiums, the report said.

The economic downturn also has “skewed utilization patterns over the last few years, creating havoc with actuarial pricing models,” the report said. During 2009, medical utilization was higher than anticipated, while it was unexpectedly much lower in 2010, it said. Due to the unpredictability of medical use patterns, “it is unclear whether insurers will have priced appropriately for 2011.”

“Overall we expect that these challenges will exert negative pressure on the credit fundamentals and ratings of health insurers into the foreseeable future," Zaharuk said. However, larger, more diversified companies will be better positioned to meet the coming challenges, the report said.

The report, US Healthcare Insurers: Outlook Remains Negative is available at http://www.moodys.com.

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