[February 15, 2013]

A.M. Best Special Report: Health Insurers Navigate a Sea of Change

Health insurers continued to prepare last year for the full implementation of the Patient Protection and Affordable Care Act (PPACA), even as they stood waiting for the June 2012 U.S. Supreme Court decision which upheld the law, including the individual mandate, according to a newly released special report from A.M. Best Co. Carriers were not idly waiting for this legal decision and have been making the changes necessary to operate in the new environment. PPACA has led to new industry requirements, rules, regulations and the emergence of exchanges that will shift purchasing decisions from employers to individual consumers.

Many health insurers have diversified over the past few years and offer products to multiple segments, including individual, employer group and government-sponsored (both Medicare and Medicaid managed care), providing more diversified membership, revenue and earnings. This trend continued in 2012 with several large acquisitions announced, all of which led to diversification by segment and/or geography. Several of the larger carriers have expanded with supplemental business that is more service oriented and unregulated. These complementary products provide varied sources of earnings and cash flows, which can enhance operating results.

Health insurers' margins compressed during 2012. A broad-based trend of moderating utilization, which began several years ago and was considered unusually low, strted to reverse during the year. The impact of the minimum medical loss ratio (MLR) requirement and rate reviews pressured earnings, as did a business shift to government-funded programs with its lower margins. While the trend in utilization increased modestly, it remains relatively lower than in the past, although there was some regional variation. Medical cost trends have ticked upward slightly. However, the unusually low levels of utilization and medical trend were not sustainable, so the rise has been anticipated by most in the industry. Carriers also have faced increased expenses related to the implementation of PPACA. With the open enrollment for exchanges set to begin later this year, health insurers can expect costs to escalate further throughout the remainder of 2013. A.M. Best will closely monitor the progress of exchanges as well as the new operating environment for health insurers.

A.M. Best believes the majority of health carriers have positioned themselves to implement strategies that will allow them to adapt to the new operating environment and maintain profitability, although it could be with lower margins, increased regulation and uncertainty regarding state exchanges in the near-to-medium term. In January 2013, A.M. Best maintained its stable outlook on the health insurance industry.

However, A.M. Best has also maintained its negative view on smaller, more specialized companies operating in the individual and small-group health segments. A.M. Best has concerns about profitability, given the minimum MLR requirements, particularly over the near-to-medium term. Additionally, insurance carriers with greater size and flexibility to reduce administrative costs could lower pricing more easily while still maintaining profitable margins. This could lead to more competitive pricing and make it more difficult for the smaller, more specialized carriers to compete.

For the full, complimentary briefing, please visit http://www3.ambest.com/bestweek/purchase.asp record_code=209328.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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