Health insurers are in for a stable ratings future

The future looks stable for U.S. health insurers, according to a report by analysts at S&P Global.

Job growth is bolstering the commercial health insurance market as workers enroll in employer-sponsored coverage. Aging Baby Boomers are commonly opting for Medicare Advantage, the privatized version of Medicare. And states are increasingly shifting their sickest residents to managed Medicaid programs.

What's more, five years after the ACA exchanges were implemented, insurers are turning profits on the individual market and margins could reach "peak earnings in 2018," according to the S&P report, which also noted that November midterm elections helped relieve legislative uncertainty in the near-term. These factors support credit rating stability in 2019, S&P said.

"A combination of still-favorable business conditions, financial factors and diminished near-term legislative uncertainty balance concerns relating to merger and acquisition activity, elevated policy risk and re-emergent legal overhang," the report stated.

Health insurers this year will continue to derive more of their revenue from government-sponsored insurance products, including Medicare Advantage, managed Medicaid and the public insurance exchange because of the aging population and healthcare reform, according to the report. Movement toward government products, however, could add to insurers' compliance, administrative and technical burden.

S&P predicted that newer and smaller health insurers with less capital and technology will struggle to enter the market and compete because of high operational barriers to government-sponsored insurance. That's especially true as large health insurers continue to merge or form joint ventures with other healthcare companies. CVS Health and Aetna, and Cigna Corp. and Express Scripts both recently closed their billion-dollar mergers.

Despite employment and demographic trends bolstering insurers' bottom lines, S&P said healthcare cost inflation, a tighter pricing environment and a wider gap between revenue and profit in some business lines could moderate insurers' profitability and squeeze margins.

While the November 2018 midterm elections, which saw Democrats take control of the U.S. House of Representatives, alleviated insurers of some legislative uncertainty, the Trump administration's support of alternative insurance coverage, such as short-term health plans, and its support of the December federal court ruling invalidating the Affordable Care Act poses risks for insurers.

"In connection with the outcome of the 2018 midterm elections, we believe repeal/replace is now unlikely to be an issue for 2019, resulting in diminished near-term legislative uncertainty. However, the sector continues to grapple with elevated policy risk and judicial overhang stemming from the December 2018 ruling…in a Texas District Court invalidating the law."

S&P said about 70% of the health insurers it analyzes were rated "A" or higher through Dec. 31, 2018.