Moody's downgrade of U.S. health insurance sector - examining the causes


Speculation is rife about what will happen with healthcare in 2014. Now one of the first predictors has publicly voiced its opinion. On Wednesday, I read with great interest that Moody's revised its outlook for the U.S. healthcare sector to negative from stable. They based their ratings on expectations that changes in the competitive landscape and regulatory environment caused by the Affordable Care Act (ACA) will exert negative pressure on the sector. The rating agency points to the key provisions of the ACA program affecting the credit profile of U.S. healthcare insurers.

Moody's cited four key factors for this ratings change:

  1. Uncertainty in connection with individual policies being sold in the insurance exchanges
  2. The fees imposed on insurers to help fund the program
  3. Lower Medicare reimbursement rates
  4. The delay of the employer mandate

The lack of good news from the insurance exchanges supports Moody's outlook. The latest figures released by the Center for Medicare and Medicaid Services (CMS) show more than 2.1 million Americans signed up for health coverage in the last three months of 2013 through the insurance exchanges. The numbers lagged behind the Obama administration's target of 3.3 million sign-ups by the end of December. Out of the 2.1 million who signed up, 24% of enrollees so far have been between the ages of 18 and 34. Originally it was hoped that around 40% of young, healthy adults would purchase coverage to help offset the high-risk pool.

The root cause of the low enrollment numbers points to the federal website was created to facilitate healthcare exchanges in 26 states while 16 states have chosen to run their own marketplace exchanges. The federally run website was intended to provide a marketplace for the uninsured and those who qualify for health insurance coverage under the law, but numerous system setbacks prevented enrollees from signing up. In some state-run exchanges like Maryland, Colorado, and the District of Columbia, the technical problems mirror the same issues facing the federal exchange. A new report shows that CMS contracted the IT firm Accenture to help mend the broken website.

The Obama administration and the insurance sector hope that the enrollment numbers will increase including the healthier young adult population as the program nears its enrollment deadline in March. Whether this happens or not, some insurers are expected to pay a reinsurance fee – a temporary fee meant to raise $25 billion over the next three years to help pay for the cost of those with pre-existing conditions signing up for coverage through the insurance exchanges. Insurers are hoping to offset this fee from the overall enrollment numbers.

Now for the potentially bad news for insurers...

One of the revenue streams for insurers covers the Medicare population. The privately run Medicare plans known as "Medicare Advantage" already faced steep cuts under Obamacare, but new rounds of reductions are slated to take effect in 2015. These new cuts will cause the private Medicare option to shrink further over the next few years. The new reductions are the result of a slowdown in the overall growth of Medicare spending reflected by the reduced utilization of medical services. While the slower rate of growth in overall Medicare spending comes as good news for the federal government, it is bad news for insurers who will face lower than expected rate reimbursements. Insurers may reduce investments in Medicare Advantage plans or completely abandon this line of business.

While the individual mandate of the ACA program is nearing the end of its first open enrollment in March, employers and insurers are bracing for another round of ACA regulations called the employer mandate. The so-called "play or pay" ACA employer mandate requires employers with 50 or more full-time equivalents to offer coverage to full-time employees and their dependents or pay taxes if an employee obtains exchange coverage and a premium tax credit. This new regulation will directly impact insurers depending on how employers decide to comply with the law.

The author of Moody's report said, "The true test of how the ACA will impact insurers will come at the end of March, when the administration releases its final enrollment report." The author also stated it would take positive news regarding the implementation of the ACA for the firm to upgrade the industry back to stable.

What do you think about the Moody's downgrade? Will other rating agencies follow suit or wait for final enrollment numbers to be released?


Kimberly George, SVP, Senior Healthcare Advisor

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