Moody’s cites ObamaCare in Downgrade Insurance Sector to Negavtive

New York, January 23, 2014 — Moody’s changed the outlook for US health insurers to negative from stable, as implementation of the Affordable Care Act (ACA)continues to create uncertainty for the industry, says Moody’s Investors Service in its new industry outlook “US Healthcare Insurers: Outlook Changed to Negative from Stable.”

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The ACA—signed into law in March 2010—seeks to increase affordability of health insurance and expand both public and private insurance coverage through a number of mechanisms including exchanges, mandates and subsidies.

“While we’ve had industry risks from regulatory changes on our radar for a while, the ongoing unstable and evolving environment is a key factor for our outlook change,” said Stephen Zaharuk, a Moody’s Senior Vice President and author of the report. “The past few months have seen new regulations and announcements that impose operational changes well after product and pricing decisions were finalized.”

Uncertainty over the demographics of those enrolling in individual products through the exchanges is a key factor in Moody’s outlook change, says the rating agency. Enrollment statistics show that only 24% of enrollees so far are aged 18-34, a critical group in ensuring that lower claim costs subsidize the higher claim costs of less healthy, older individuals. This is well short of the original 40% target based on the proportion of eligible people in this cohort, says Moody’s.

In addition, the impact of the industry assessment tax that begins in 2014 is unclear, says Moody’s. The rating agency notes that while some insurers built this tax into their premium calculations, the amounts received may still be insufficient to cover their share of the assessment.

Medicaid business is particularly vulnerable to this disconnect, as insurers cannot pass on additional costs to consumers, and it remains to be seen whether states will permit insurers to factor in the assessment cost in determining Medicaid reimbursement rates.

Looking forward, Moody’s expects reduced net earnings margins of approximately 2% in 2014, compared to an average of 3% the previous year and smaller overall membership growth of approximately 1%, down from 3% in 2013, with company strategies continuing to focus on revenue and income diversification.

Still, these changing dynamics will have an uneven effect on insurers, as the impact of these factors will vary by market segment and geography. Moody’s view continues to be that the larger and more diversified insurers will be better positioned, both financially and strategically, to meet the challenges facing the sector.

Moody’s research subscribers may access this report at: https://www.moodys.com/research/US-Healthcare-Insurers-Outlook-Changed-to-Negative-from-Stable–PBC_163188

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