|[February 15, 2013]
A.M. Best Special Report: Health Insurers Navigate a Sea of Change
OLDWICK, N.J. --(Business Wire)--
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
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
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
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