The unprecedented events of 2020 portend both good and not-so-good things for the future of the health insurance industry, a new Fitch Ratings report finds.
First, the good. Fitch's authors wrote that the COVID-19 pandemic shined a spotlight on the importance of having health insurance for businesses, institutions and individuals alike. Going forward, that should solidify demand for basic and supplemental health coverage, Fitch said.
The pandemic also forced an increased focus on personal health and safety, another boon for insurers if it means they'll spend less to treat serious illnesses or adverse outcomes in the future. In addition to highlighting the importance of a healthy lifestyle and addressing chronic illness, the pandemic encouraged the use of masks, hand washing and social distancing, the report said.
The higher acceptance of infection control measures could mean milder flu seasons in the future—which would be good for insurers, said Brad Ellis, a senior director with Fitch. The flip side of that, though, is that COVID-19 could have long-term health effects on patients' vascular health and other areas that may be expensive for insurers, he said.
Another concern is that the preventive tests and procedures people delayed at the height of the pandemic will result in more severe cases of cancer or other illness when they're diagnosed, Ellis said. The reports of fewer emergency room visits for heart attacks and strokes are also concerning, as it indicates people still experienced those events but didn't go to the hospital, he said.
"This will make pricing health insurance products more difficult for '21 and '22," he said.
That delay had led to enormous profits for the country's largest health insurers in the second quarter of 2020, which ended June 30, as hospitals and physician practices put off elective procedures to preserve volume for coronavirus patients.
A possible negative trend for insurers, though, is the apparent shift in public sentiment toward accepting significantly more government participation in health insurance.
The report said the 2020 election, while highlighting the country's divided political views, also showed that a much larger portion of Democrats support some form of single-payer approach. That was especially true during the Democratic primaries.
"The evolution of such sentiment will be an issue to watch closely on the road to the 2022 midterm elections," the report said.
Ultimately, Fitch wrote that a single-payer model would be transformational for health insurers. Even if not fully adopted, the general sentiment could pave the way for acceptance of ultimately enhancing the Affordable Care Act with a public option, and further expanding access to Medicare and Medicaid. Tuesday's oral arguments by Supreme Court justices seemed to indicate the ACA will survive a Republican lawsuit seeking to scrap the law.
Another negative in the insurer outlook concerns lowered interest rates, which likely means the interest income insurers earn from their investment portfolios will decline, Ellis said. Usually, insurers derive between 10% and 15% of their pre-tax income from investment income, with a large piece of that being what they earn on interest on their investment-grade portfolios, he said.
Going forward, that means insurers will become more reliant on underwriting profits. However, Ellis said the ACA limits the amount of profit insurers can make from underwriting.
"So really the only place they have left to maintain profits is to lower administrative expenses, which is challenging," he said.
Insurers with a track record of strong pricing and risk assessment will be most successful, according to Fitch.
Going forward, insurers will focus on spotting efficiencies and cutting expenses to offset declines in investment income. That could take the form of staff reductions, putting off operating investments, closing offices and lowering pay or benefits.
"It's going to be an interesting couple of years for this sector and for all sectors of the insurance industry, I think," Ellis said.
