3 effects of a possible Blues' individual health recovery

Analysts at Standard & Poor's Financial Services LLC have looked hard at the big individual major medical insurance issuers and detected a pulse.

Deep Banerjee and other analysts at the New York-based firm found signs of life in the financial reports of most of the Blue Cross and Blue Shield carriers.

Related: Anthem earnings, dissected

For the first nine months of 2016, the Blues studied had a combined medical loss ratio, or ratio of medical claims to revenue, of about 90 percent.

That was down from a combined medical loss ratio of 103 percent for the comparable period in 2015.

Twenty-one of the 32 Blues included in the analysis still had medical loss ratios high enough to suggest that they suffered underwriting losses, after taking administrative costs into account.

But "75 percent of the Blues included in our study had an improved MLR through the first nine months," the analysts write.

Blue Cross and Blue Shield of North Carolina, for example, suffered through a terrible year in 2015. The Durham, North Carolina-based carrier reported a miserable 101 percent medical loss ratio for the first three months of 2015, and 103 percent medical loss ratio for all of 2015.

For the first nine months of this year, the company's medical loss ratio has fallen to 79 percent.

Analysts blame the 2015 losses partly on problems with major ACA insurer stabilization programs, such as the ACA risk corridors program, which was supposed to use cash from thriving exchange plan issuers to help struggling issuers. The analysts also blame insurers' lack of knowledge about how the ACA system was really working when they were setting 2015 rates.

The S&P study has limitations: Analysts excluded the many Blue Cross and Blue Shield companies controlled by Indiana-based Anthem Inc. They also excluded Blue Shield of California, because the California financial reporting format is much different than the format for the other non-Anthem Blues.

Everyone has opinions about the Affordable Care Act. But the rating agencies' views carry extra weight, because what the rating agencies think about a company or an industry affects how much companies pay for loans.

For a look at more about the Blues' individual health line performance and what that might mean for agents, brokers and clients, read on.

One way the Blues held down claims was to seek steeper discounts from a smaller number of doctors and hospitals. (Image: Thinkstock)

One way the Blues held down claims was to seek steeper discounts from a smaller number of doctors and hospitals. (Image: Thinkstock)

1. Skinny provider directories

Health care providers hate tough health plan rate negotiations and narrow provider networks that shut them out, but S&P is giving the narrow network strategy some of the credit for improving the Blues' results. S&P analysts aren't saying anything about moves to expand provider networks.

S&P says health insurers like the new ACA exchange moves to police applications. (Image: iStock)

S&P says health insurers like the new ACA exchange moves to police applications. (Image: iStock)

2. Free rider crackdown

The drafters of the Affordable Care Act eliminated most of the benefit design and underwriting defenses health insurers once used to hold down claims.

To give them some help, regulators and exchange program managers created the open enrollment period system, or limits on when people can buy health coverage without showing they have what the government, and insurers, think is a good reason to be shopping for coverage. The system is supposed to keep consumers from acting as "free riders," or paying for health coverage only when they expect to need open heart surgery or lung transplants any day now.

Managers of HealthCare.gov and the state-based exchange programs have been trying to bring the hammer down on free riders lately, and the S&P analysts expect to see the hammer keep hammering.

The recent tightening of special enrollment period rule enforcement does seem to have helped cut underwriting losses, the analysts say.

But the analysts say insurers might ease up on consumers in another way, by asking for moderate premium increases for 2018 coverage, rather than the giant increases requested for 2017 coverage.

"We view 2017 as a one-time pricing correction," the analysts say.

Recovering Blues could see increasing compensation for licensed agents and brokers as a tool for improving application rule compliance enforcement, but they could also see holding compensation down as part of the overall effort to cut the fat out of administrative costs, and to cut off limbs if eliminating fat doesn't get costs where they need to be.

The S&P analysts say a sudden ACA program repeal could throw off projections. (Image: Thinkstock)

The S&P analysts say a sudden ACA program repeal could throw off insurers' projections. (Image: Thinkstock)

3. Fear of 2017 wild cards

The S&P analysts believe that, all other things being equal, the carriers' narrower networks and higher premiums, the exchanges' tougher eligibility police, and carriers' improved understanding of how ACA rules and programs really work should help the Blues' individual health units get closer to break even in 2017.

But, even if the current rules and underlying trends stay stable, the Blues could take until 2018 to reach their target of achieving low single-digit profit margins on individual health sales, the analysts say.

Any legislative changes that affect Affordable Care Act programs in 2017 could lead to big changes, the analysts say.

"Insurers did not price for repeal," the analysts say. "So, if the uncertainty around the future of health care affects consumer behavior such that it is contrary to pricing expectations, then 2017 results may be weaker than we expect."

S&P analyzes risk corridors shortfall hit

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