Insurers’ financial outlook upgraded to ‘stable’

Analysts at A.M. Best have revised their outlook for the health insurance industry from negative to stable for 2018, saying the Affordable Care Act (ACA) exchange business that dragged down profits in 2014 and 2015 has improved thanks to rate increases and narrower provider networks.

In those years, according to the A.M. Best outlook, losses in the smaller individual segment negatively impacted positive earnings from group, Medicaid and Medicare Advantage business. In 2016 and 2017, the exchanges stabilized as insurers either left the market in many states (as major insurers like Aetna and Humana did) or hiked premiums to adequately cover a sicker-than-expected risk pool.

Though the exit of major carriers has left customers with fewer options, it’s a positive for the remaining health plans which have a “better understanding” of those risk pools and a more stable membership which doesn’t have a pent-up demand for medical services.

“This stability provides insurance companies an opportunity to engage members in population health management and to aid in improving an individual’s health and to prevent unnecessary hospitalizations owing to unrelated medical conditions,” analysts wrote.

After a decidedly uncertain year when it came to the ACA’s future, A.M. Best predicted the House and Senate “may choose to focus on other issues.” Even though a major ACA change was passed late in the year with the repeal of the individual mandate, it won’t go into effect until 2019 and A.M. Best expects those willing to pay the current premiums on the exchanges will keep their coverage. The elimination of the penalty for not buying ACA-compliant coverage may also provide a new market for supplemental plans which are less expensive—and offer fewer benefits—than what can be found on the exchanges.

Outside of the individual market segment, A.M. Best expects continued profitability in the group market, with value-based arrangements and higher out-of-pocket costs limiting utilization. Medicare Advantage growth should also continue, analysts, though with tighter margins as more competitors jump into the market.

Medicaid managed care business is expected to remain profitable, as well, but analysts predicted slower growth in 2018 as ACA provisions kick in forcing states to pay for a portion of their expanded Medicaid population.

Some pressures do await the insurance industry in 2018, however—namely, a flurry of merger and acquisition like the CVS-Aetna and Kindred-Humana deals.

“The new focus is on vertical integration: a merging of healthcare functions among providers, payers, care management and finance. This new wave of vertical mergers may provide new lower cost care delivery opportunities over the medium term,” A.M. Best analysts wrote.

Smaller carries who may have too much exposure to dramatic shifts in the individual market’s fortunes may face tougher times this year. For more diversified carriers, A.M. Best analysts expect all business segments to improve in 2018.

“A.M. Best believes that insurers overall have been able to adapt and thus does not anticipate any significant deterioration in general market conditions—hence, the revision in the outlook for the health insurance industry to stable,” analysts wrote.