Health Insurers Face the Rating Analysts

News February 25, 2022 at 01:42 PM
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Big, publicly traded health insurers are reporting higher operating earnings, but outside problems slowed their 2021 earnings growth.

Dean Ungar, a senior credit officer with Moody's Investors Service, and other Moody's analysts have given that assessment in the rating agency's review of the insurers' latest results.

One measure of the insurers' earnings, "earnings before interest, taxes, depreciation and amortization," or EBITDA, increased 3% between 2020 and 2021.

That figure was "below our forecast of mid-to-upper single digits and also below growth in recent years," the analysts write.

The analysts estimate that the insurers' EBITDA growth will increase to somewhere between 10% and 15% this year.

Here are three of the forces that might have caused the insurers to fall below Moody's projections in 2021, according to the analysts.

1. The COVID-19 Pandemic

Earlier in the pandemic, surges in the number of severe COVID-19 cases usually reduced the amount of care patients received for other conditions. That helped hold insurers' health care spending steady.

In the fourth quarter of 2021, weaker-than-expected earnings growth was due partly to the increased cost of coping with the effects of the COVID-19 delta and omicron variants, according to the Moody's analysts.

2. A Shadow Over the Medicare Advantage Plan Market

Early this year, Humana implied that it saw what it perceived to be potentially undisciplined price competition in the Medicare Advantage plan market.

Executives from other insurers later said the level of competition in the market seemed to be at the normal level of ferocity.

The Moody's analysts say they believe that enrollment growth at several large insurers has been slowing, or is likely to slow this year, and that "it seems clear that competition is forcing more of a trade-off between growth and margin."

3. Individual Major Medical Market Rule Changes

Policymakers in Washington tried to help Americans through the COVID-19 pandemic by increasing Affordable Care Act public exchange plan premium tax credit subsidies and group health coverage continuation subsidies.

Current federal rules call for the extra subsidies to expire at the end of the year.

Policymakers also eased consumers' access to exchange plan coverage, by letting people sign for coverage almost year-round.

For most of the past eight years, insurance regulators and health insurers required most consumers to sign up for coverage during limited "open enrollment periods," to limit the odds that consumers would use the current lack of medical underwriting as a chance to pay premiums for individual health insurance only when they were sick.

One question was whether the open enrollment period system was doing much to reduce health insurers' claim costs, and whether the long COVID-19 "special enrollment" periods would increase claim costs.

The Moody's analysts predict that expiration of the extra COVID-19-era premium subsidies will hurt health insurers' earnings going forward.

The analysts suggest that the pandemic-related special enrollment period rules have had a noticeable effect on health insurers' earnings.

The easing of the usual enrollment period rules increased ACA public exchange plan enrollment to 14.5 million, from 12 million, but "it also led to significant adverse selection, which caused performance to decline," the analysts write. "The insurers have responded with pricing actions and product redesign, which could lead to lower enrollment but better performance."

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(Image: Centers for Medicare & Medicaid Services)

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