Dive Brief:
- The U.S. health insurance industry can expect to see the entrance of more nonprofit hospitals over the next several years as they seek to gain market share or to reduce healthcare costs through improved care management, Moody's Investors Service reports.
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Starting or acquiring a health plan carries high credit risks, Moody's notes, particularly due to intensifying competition and rising start-up costs. The issue of competition is compounded by the potential mega-mergers of Anthem and Cigna, as well as Aetna and Humana.
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Despite the risks, Moody's predicts the trend will continue, particularly among large health systems that can afford to absorb the costs.
Dive Insight:
The trend is driven in large part by the ACA, which incentivizes care coordination, cost reductions and population health management, Moody's writes in its report, "Hospitals Entering Insurance Business Gamble on Long-Term Payoff."
The authors note nonprofit hospitals with health plans tend to operate with noticeably lower operating cash flow margins than comparable hospitals without them. They attribute this is to the "inevitable mismatch" between expense ramp-up and premium reserves necessary for cash reserve requirements to execute the plan. "The effect on credit will largely be driven by the pace and magnitude of the strategy and management's ability for rapid adjustment, if needed," Moody's announcement states.
It adds health systems that have successfully managed long-standing health plans maintain significant cash reserves to weather insurance cycles and regulatory changes.