A.M. Best gives health insurance industry a negative rating

A.M. Best announced Monday that it is maintaining a negative outlook for the health insurance industry. In its new report, 14 companies received financial strength rating downgrades in 2010 because of weakened capitalization, less parental consideration or a changed or weakened business profile. Another 31 companies received financial strength rating upgrades in 2010, mostly due to increased parental consideration or changes in a parent's ownership, A.M. Best officials said. Net income for health insurers in 2010 is expected to be greater than 2009, A.M. Best predicted. The growth in earnings is attributable to an increase in underwriting results and better investment income as companies are reporting more realized gains and fewer other-than-temporary impairments. According to A.M. Best, the improvement in underwriting income in 2010 resulted from several factors, including a milder flu season, an absence of the number of H1N1 virus cases in 2010 compared with 2009 and a decline in healthcare use, especially in the commercial segment. As the unemployment rate stabilized in 2010, in-group losses in the commercial sector decreased, according to A.M. Best. Although commercial enrollment has been negatively impacted by the economic downturn and the rise in unemployment, health insurance companies have experienced growth in government-sponsored programs, including Medicaid managed care and Medicare Advantage. While overall net income is expected to improve in 2010, A.M. Best expects margins to decline in 2011. The decline is attributable to several factors, they said, including an expected return to more normal levels of use in 2011, adjustments to pricing and benefits to bring loss ratios in line with the new minimum requirements under federal healthcare reform and an increased level of review of rate increases. Margins may be negatively affected by an expected return to more normal use levels, but when this will occur and to what extent are unknown, A.M. Best analysts predicted. There also is some concern that use could increase beyond what is considered normal because individuals may have been postponing necessary treatment, they said. While profitability and capitalization have improved, A.M. Best experts said they are concerned about the near-term impact of the Patient Protection and Affordable Care Act. Margins are expected to narrow as health insurers adjust pricing to meet the minimum loss ratio requirements under the ACA that will take effect this year. Under the ACA, health insurers need to meet a minimum medical loss ratio of 80 percent on individual and small groups and 85 percent on large groups. This ratio will be calculated on a state-by-state basis, and health insurers will be required to give rebates to policyholders if they do not meet the minimums. As a result, many insurers have adjusted benefits and pricing to align the loss ratio with the new requirements, A.M. Best found. Also required under the ACA is "rate reasonableness." For the individual and small group markets, rate increases of 10 percent or more need to be justified. This part of the ACA becomes effective for filings made by July 1, 2011 or later, and applies to all states. According to A.M. Best, the rate review process may take longer, and states can modify the amount of the requested increase. In addition, there may be delays in implementing rate increases. In states that do not have a rate review process, the Department of Health and Human Services will perform the function. While many states scrutinized rate increases in 2010, much of this was in the individual market, A.M. Best found. The rate review process also includes the small group market. The timing and amount of actual rate increases, if different from what was requested, could impact profitability, A.M. Best predicted. Both the minimum medical loss ratio and rate review requirements may have a larger impact for companies that specialize in the individual and small group major medical markets, as well as smaller stand-alone companies, according to A.M. Best. The individual product line tends to have lower medical loss ratios – in the low 70 percent range – and higher administrative expenses, particularly for first-year policies, A. M. Best said. This is due to the high broker commissions and the costs of setting and administering individual policies, as well as lower claim expenses that typically are experienced in the first year. The minimum loss ratio requirement could be an issue for some carriers, A.M. Best experts said, although some have reduced broker commissions for 2011 to help lower expenses. The implementation of a rate review process in the individual and small group market may put rate increases under more scrutiny. Smaller stand-alone insurers may not be able to achieve the savings on administrative expenses that they would like, given their lack of scale and the implementation of the minimum medical loss ratio requirement, A.M. Best experts said. According to A.M. Best, there will also be costs associated with implementing systems and procedural changes for both the ACA requirements and the implementation of ICD-10.