Fitch upgrades outlook for health insurance industry

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Despite the ongoing policy uncertainty facing the health insurance industry, Fitch Ratings has upgraded its outlook for the sector from negative to stable.

The ratings agency said the change reflects its heightened comfort that the sector’s business model and underlying financial profile will remain largely intact over the next year or two. One of the stabilizing factors, Fitch said, is the continued growth of Medicare Advantage, which has driven insurers’ “intense interest” in expanding their MA presence both organically and inorganically. 

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The growth of MA is fueled by both an increasing number of Americans aging into the program and relative stability in funding for Medicare, the report said. However, Fitch also cautioned that recent federal budget resolutions have included cuts to Medicare, adding that MA could also see disruption tied to the government’s ability to set reimbursement rates and penalize plans for compliance issues.

Another key business line for insurers—Medicaid managed care—also faces potential funding pressure since Medicaid cuts play a role in two of the GOP’s prime legislative goals: Affordable Care Act repeal and tax reform. Funding cuts could reduce reimbursement rates for health plans, further squeezing the already-thin margins generated by their Medicaid business, Fitch said.

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The report also noted that there’s likely to be more variation between state-by-state financial results of insurers’ ACA exchange business, given the different ways state regulators allowed insurers to account for the disappearance of cost-sharing reduction funding. 

On the merger and acquisition front, Fitch said the collapse of the Aetna-Humana and Anthem-Cigna deals has significantly reduced the potential for further M&A activity between the five largest insurers. 

However, the agency expects to continue to see smaller-scale acquisitions that are designed to add strategic business capabilities. It also sees potential for large-scale M&A activity to defend against competitive threats posed by “large, well-funded potential competitors from outside the traditional healthcare industry.”

In fact, Fitch said the ratings implications of acquisitions involving an insurer and a noninsurer—like the CVS-Aetna deal—would likely be negative, as the adverse effect of financing such deals would likely outweigh the potential positive competitive benefits.

A major political shift, such as a change in the majorities in Congress, could also alter Fitch’s outlook down the road, it noted. 

Fitch’s recent ratings action comes on the heels of a report the agency released in November, which concluded that Blue Cross and Blue Shield companies’ financial performance improved significantly in the first half of 2017.