Health insurance companies will raise premiums and fight hospital reimbursement increases next year as they look to control rising costs, according to a report Fitch Ratings issued Wednesday.
Lingering effects of the COVID-19 pandemic, regulatory changes to Medicare Advantage, inflation and interest rates, and Medicaid redeterminations will impact health insurance finances next year, the credit ratings agency predicts.
Related: 5 factors impacting next year's hospital financials
Fitch maintains a "neutral" rating for publicly traded health insurance companies in its report. "Fitch believes that the health insurance sector is facing a shift from pandemic-related risks to increasing regulatory strains and economic pressures, but will continue to demonstrate resilience," Senior Director Brad Ellis wrote in the report.
Here are five factor that Fitch Ratings predicts will influence health insurance company finances in 2024:
1. Medicare Advantage
Expenses related to “long COVID-19,” a continued surge in demand for deferred elective surgeries and increased hospital volumes will modestly decrease margins in 2024, according to Fitch.
Health insurance companies' projections for Medicare Advantage next year vary. UnitedHealth Group and Humana, for example, expect utilization to remain high, while Aetna parent company CVS Health anticipates the opposite.
These conflicting opinions, as well as insurer disclosures of an unexpected spike in utilization earlier this year, demonstrate how hard it is to price for the effects of postponed care, Ellis said in an interview. Insurers will promote lower-cost outpatient facilities to Medicare Advantage enrollees, he said.
2. Star ratings
The Centers for Medicare and Medicaid Services tightening its assessments of Medicare Advantage quality will continue to affect insurance finances.
Aetna expects to lose up to $1 billion and Elevance Health predicts $500 million lost because of fewer star ratings bonus payments, the companies have disclosed.
CMS projects star ratings will decline for 13% of Medicare Advantage carriers during the next round because the agency is replacing the "reward factor" for plans that have demonstrated high performance over multiple years with a health equity index that will pay bonuses to plans that address disparities.
3. Inflation and contract disputes
Hospitals struggling with rising labor and medical supply costs are likely to demand reimbursement hikes next year, according to Fitch. The standard three-year-long contract length acts as a temporary shield from inflation and gives insurers time to adjust premiums, Ellis said.
Nevertheless, more contract disputes are likely to go public, Ellis said. “Anytime you see costs going up and provider systems asking for large increases from the payers, it creates a lot of friction for insurers. Those public contract disputes will probably continue," he said.
Inflation could also drive an economic slowdown during the first half of 2024, which could ding small- and large-group enrollment at insurers heavily exposed in those markets, such as Cigna, Ellis said.
4. Interest rates and investments
Health insurers' investment portfolios typically mature every three years, which is allowing companies to reinvest one-third of their bonds annually at a higher interest rate and pocket the return, Ellis said.
For example, UnitedHealth Group reported $2.9 billion in investment income through the third quarter, up 148% from the year-ago period, which the company attributed to higher interest rates. UnitedHealth Group expects to generate $4.1 billion from investments next year, executives told investors at an event last month.
5. Medicaid risk pools
The Medicaid redetermines process that began in April has already resulted in nearly 12 million disenrollments, and the beneficiaries who remain are likely to have higher medical costs that may burden Medicaid carriers, Ellis said.
Molina Healthcare expects to lose more than half, or 480,000, of the Medicaid members it gained while states paused reviewing their rolls and is seeking larger payments next year to compensate for less favorable risk pools, CEO Joseph Zubretsky told investment analysts during an earnings call in October.
