In the first half of this year, A.M. Best upgraded the ratings of more health insurers than in the same period in 2017, according to a report released last week. The credit rating agency attributed the uptick to improved performance in the ACA exchanges and heightened profitability across the board.
The company reported nine rating upgrades and three downgrades in the health payer segment. In first half of 2017, downgrades superseded upgrades six to four.
In January, A.M. Best revised its market segment outlook for the U.S. health insurance industry from negative to stable. It ascribed the improvement to ongoing profitability in both the ACA individual exchange business and other commercial spaces, along with overall slower premium growth, which — taken together — ameliorated the pressure on risk-adjusted capitalization.
The report bodes well for payers that have found a way to eke profits from the ACA exchanges, such as Centene, and those (such as Anthem) that have hoarded savings from stringent cost-cutting regulations at which providers and other critics balk.
The credit rating agency highlighted UnitedHealth Group and its subsidiary Sierra Health for their ratings updates — upgrades that reflected the "strengthening of risk-adjusted capitalization, a trend of strong premium growth, and very favorable earnings, with low volatility." The organization's size and relative stability in a shifting space didn't hurt, either.
Highmark Inc. Group also received a shoutout for its positive rating for similar reasons. On the flip side, New York-based EmblemHealth saw a rating downgrade, due to its losses and restructuring costs.
The A.M. Best upgrades were due to U.S. health insurers reporting better operating results in a stabilized ACA individual exchange business, along with slower premium revenue growth. Also, the industry is riding high on the two driving factors of consecutive years of high rate increases and a narrowing of provider networks, according to analysts.
Although the report was generally positive regarding insurers' prospects, a nominal section of the industry did report losses in H1 of this year, driven partially by employers cutting out the middleman and contracting directly with providers.
"The primary reasons for ratings downgrades among the largest health rating units were poor earnings, weakened capitalization, and limited business profiles," according to the report
More large employers are opting to self-insure their workers, inking contracts that are on average less profitable for payers. According to A.M. Best, the government might also strive to reduce Medicaid and Medicare Advantage reimbursement, further curtailing insurers' bottom lines.
Smaller insurers lacking the operating size to remain steady were more apt to be shaken by industry headwinds and were less likely to have stable income from other lines of business to offset ACA losses, unexpected expenses or regulatory uncertainty (especially the risk-adjusted payment back-and-forth that played out a month ago).
Yet the generally-sunny report stressed that combined earnings in commercial groups, Medicaid and MA offset those losses, contributing to an overall profitability in the sphere — and a positive outlook moving forward into H2 of 2018.
The credit rating agency expects the robust economy to drive greater demand for health care and, correspondingly, greater demand for health insurance. Additionally, Congressional interference in the ACA seems unlikely at this moment, pending the outcome of the Texas v. United States litigation over the individual mandate.
But there's also uncertainty around the Health Insurance Provider Fee, which returned for 2018 and is meant to stabilize rates. How that charge will influence rates and plan designs remains uncertain, according to A.M. Best.
Additional pressure on profits stem from an increasingly older population enrolling in managed care like MA. Though enrollment may skyrocket in coming months, that lucrative market may be stymied by greater patient costs due to severity and frequency of illnesses.
Moving forward, A.M. Best predicts that insurers will laser-focus their attention on slowing the rise of medical costs across the board with initiatives such as increasing value-based contracts with providers, directing patients to head to outpatient settings instead of pricey hospital facilities and identifying high-risk patients for care coordination.
A.M. Best predicts the sector will most likely continue to explore emerging technologies as well.