The corporate scions of American health insurance are making valiant, if risky, strides in the new ACA market. But their ratings still show the promise of their prowess.
Much as they are seen as a pack, occasionally accused of gaming the markets by way of geographic noncompete agreements, and do face common challenges, the Blue Cross and Blue Shield companies who dominate many markets face "different shades" in the new Affordable Care Act era, according to S&P credit analyst Deep Banerjee.
Harking back to the days of the Great Depression, the 37 Blue Cross and Blue Shield licensed-companies cover some 105 million Americans, controlling more than half of the health insurance markets in more than half of the states.
With the notable exception of Wellmark BCBS of Iowa and Nebraska, the Blues dove into the public exchanges with a strategy in of protecting their incumbancy, embracing nonprofit or mutual ownership, or capitalizing on one of the two main growing insurance markets (the other being Medicare Advantage).
Generally, they have a strong brand and local presence, satisfactory business risk and strong financial risk profiles, and "robust capitalization," Banerjee wrote in a recent report for the ratings agency. (Some Blues have capitalization that is too robust, in the eyes of certain regulators.)
Yet, as Banerjee detailed, the Blues very much face "short-term operating performance volatility" directly related to their work in the exchanges and their somewhat precarious foothold on market dominance -- a dominance that is not guaranteed as startup insurers, provider-owned plans and for-profits like Aetna, United and Human vie in the new health reform market.
"In the longer term, the Blues' credit quality will suffer if they are unable to turn around their ACA-related business, regenerate capitalization levels, and maintain their strong regional market positions," Banerjee argued. "We initially expected the Blues to have a leading market share in their respective exchanges, but we did not expect them to end up with the majority of members."
In the first open enrollment, Blues flooded state HIX markets, and enrolled the majority of new members in 12 of 15 states studied by Avalere Health; in Maryland, Michigan, Rhode Island, Vermont and Washington D.C. the Blues enrolled 90 percent of new membership.
The health acuity of the newly insured is generally uncertain, and if anything likely to be a driver of high claims -- as evidenced by one of the most prolific underwriters in the exchanges, a now near-bankrupt ACA-funded cooperative insurer, led by a Blue Cross veteran.
"We expect increased medical loss ratios to constrain the Blues' profitability in 2014 and 2015," Banejeer wrote. In general, Blues have low single-digit underwriting margins (Blue Shield of California actually limits its income to 2 percent of revenue) and those are in part boosted by their investment income, Banejeer found in an analysis.
Low single digit margins, he writes, leave "very little cushion for error."
Moreover, the Blues' historic market and their traditionally profitable business -- employer-sponsored insurance -- is stagnating in enrollment and also under attack from provider-based insurers and entrepreneurs pitching new value propositions for organizations who have been lowering costs primarily by shifting more financial burden onto their workforces.
Blue Cross Blue Shield premium revenue by line of business, via S&P.
On average, S&P rated Blues insurers have seen both underwriting and pre-tax margins declining, from 3.5 percent in 2011 to 2.6 percent in 2013. By the third-quarter of 2014, the median pretax return on revenue for the Blues dropped to 1.5 percent, with the largest decline at any one company being 5.6 percent, Banejeer found. Those results vary by the insurer of course. In 2013 the median pretax return on revenue was was 2.6 percent, while the minimum was a 2.5 percent loss and the maximum was a 7.8 percent gain.
In the coming year, the Blues will be tested, as they go "head to head with public for-profit insurers and some lower-priced not-for-profit (non-Blue) insurers," Banerjee wrote.
While the S&P gives only a few Blue companies a positive operating performance score, with more than 40 percent in the negative range, most of the Blues are rated in the A category and none are rated below the investment grade BB+. Close to 20 percent of other insurers, meanwhile, are rated below that investment grade.
"Whether they will end up humming 'Let the Good Times Roll' or 'Hard Rock Blues' remains to be seen," Banerjee noted.