Struggles to grow revenue and the near-term impact from healthcare reform are dimming the outlook for health insurance companies, according to global credit-rating organization A.M. Best Co.
Lack of enrollment gains combined with pricing pressures in the commercial sector could offset premium rate increases and impact revenue growth, predicted A.M. Best, which is maintaining a negative outlook for the sector.
The reform law's medical-loss ratio requirement—where insurers must spend at least 85% of subscriber premiums on medical costs in large group coverage plans, and at least 80% for individual and small group plans beginning in 2011—will have a significant impact on the industry, the analysis stated.
Although the definition of what is included in the medical-loss ratio is not yet available, A.M. Best said it expects to see margin compression as companies comply with the new requirement, and that health insurers will try to lower administrative expenses to help offset the effects of the medical-loss ratio requirements.
The individual market in particular faces certain challenges in complying with the medical-loss ratio requirement of 80%, mainly because this segment of the market tends to have lower medical-loss ratios—low 70% range—and higher administrative expenses.
As a result of healthcare reform, smaller individual and group carriers may consider exiting the market, the company said. “Those that stay in the market may have to change their business plan/strategies in order to continue to operate profitably in the new environment. This could include revisiting their product portfolios and considering potential partnerships/alliances,” according to the analysis.
