Ratings outlook 'stable' for health insurance industry despite uncertainty

Even with the uncertainty facing the industry, the outlook for U.S. health insurers is “stable with a downside bias,” according to a new report from a major ratings firm.

The report, produced by Standard & Poor’s analysts Joseph Marinucci and Deep Banerjee, answers several frequently-asked questions about how insurers are preparing for an unclear future.

Headwinds facing the industry include financing and integration risks associated with mergers and acquisitions; a still-unstable individual market; and heightened industry uncertainty about likely changes to the Affordable Care Act, according to the report.

The ratings outlook for the sector could turn negative if there are abruptly implemented policy changes, meaningful economic disruption or a sustained medical inflation spike, the report continues. In addition, insurers that operate on the exchanges could face additional strain if the federal government doesn’t fund cost-sharing subsidies through 2018.

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However, the report notes that uncertainty has been a consistent theme for the health insurance industry, and the relatively small size of the individual market segment ensures that the strain associated with it will have a limited ratings impact.

“We expect performance to strengthen broadly in 2017 and reflect improved earning quality overall,” Marinucci and Banerjee write. Several factors, they argue, are working in insurers’ favor:

  • Growing Medicare Advantage and managed Medicaid penetration, reflecting the government’s increasing reliance on the private sector to manage the population's healthcare.
  • Better pricing discipline, improved claims analytics and various ACA regulations all driving “what appears to be a moderated underwriting cycle”.
  • Likelihood of medical cost inflation, which has been “subdued” in recent years, remaining stable.

As for the future of competition in the industry now that both the Aetna-Humana and Anthem-Cigna mergers have been struck down in court, the analysts said the major insurers are likely to again try to make deals—though on a smaller scale.

In addition, the renewed rise of provider-sponsored health plans is likely to inject more competition into the industry, and there are signs that some insurers are starting to follow UnitedHealth’s lead in pursuing vertical integration.