Insurers’ rating outlooks tumble

Health insurers are concerned that healthcare reform could damage their companies, but the mere talk of healthcare reform is also negatively affecting them.

In light of potential healthcare reform proposals, Fitch Ratings recently revised the rating outlook of six health insurers from stable to negative while maintaining six other insurers as negative.

Combining those two decisions, Fitch Ratings, which looks at fixed income and subsidiary insurer financial strength ratings, has 12 health insurers listed as negative.

The six health insurer groups that dropped from stable to negative are:

  • Aetna, Inc.
  • Blue Cross Blue Shield of Florida
  • Blue Cross Blue Shield of Idaho Health Service, Inc.
  • Cigna Corporation
  • Coventry Health Care, Inc.
  • Health Care Service Corporation

The six insurers who remained at negative are:

  • Health Insurance Plan of Greater New York
  • Health Net, Inc.
  • Healthmarkets, Inc.
  • Humana, Inc.
  • UnitedHealth Group, Inc.
  • Wellpoint, Inc.

Fitch Ratings stated that the negative outlook “reflects the strong potential for healthcare reform and its possible adverse implications on each company’s financial strength and creditworthiness.

Although no bill has been finalized yet, and multiple policy schemes are possible, most of the alternatives being debated could weaken health insurers’ financial profiles in Fitch’s view. The negative outlook also reflects the high levels of uncertainty that currently exist with respect to the ability of individual insurers to adapt to a likely changing competitive and pricing environment resulting from reform.”

Fitch plans to address the ratings again after a healthcare reform package becomes finalized.

“Depending on the specifics of any final legislation, the net impact of healthcare reform could vary widely, falling anywhere from neutral to severely unfavorable for the ratings,” according to Fitch.

The most detrimental scenario for health insurers would be a public plan option, especially one that mirrors Medicare reimbursement rates. This would lead to severely hurting the “outlook for health insurers’ profit margins,” wrote Fitch.

“Depending on the ultimate structure, the public plan could also lead to substantial enrollment loss for private insurers,” Fitch added.

The company stated that there are three aspects of healthcare reform that could adversely affect insurers:

  • Adverse selection
  • Reduction of private insurance’s ability to adequately price products relative to medical costs
  • Shrinking the private sector’s role in the health arena

“A combination of any or all of these developments could incrementally weaken the sector’s earnings and cash flow generation capabilities,” wrote Fitch.

Joseph Paduda, principal at Health Strategy Associates, LLC, in Madison, CT, says Fitch’s analysis verifies the belief that a public plan option that forces providers to accept Medicare rates or its equivalent would “murder the private insurers,” but he doesn’t think that scenario is going to happen.

“There is zero chance of any reform measure passing that includes a public plan reimbursing at Medicare,” Paduda says.

Paduda also questions Fitch’s suggestion that there are risks associated with potential adverse selection and insurance price-fixing.

There is no chance of the government mandating premium levels and adverse selection, which could actually help private insurers, who may want to drop sick members into a public plan “if the legislation isn’t carefully written,” he adds.

Paduda acknowledges that the health insurance industry is at risk, but also thinks there are opportunities for private insurers.

Smart health insurers will use health reform as a chance to gain millions of new members and slash administration expenses by eliminating underwriting, refining marketing, and investing in population health.

“I’d note that Fitch now has all plans in negative status; I believe that is misguided, as there are clearly several that are better positioned to take advantage of reform if that happens,” says Paduda. “Their approach is too broad, too negative, and does not reflect the very real differences in approach among the plans.”




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