S&P Analysts Say Health Insurers Are Strong, for Now

A sudden cost-sharing reduction subsidy cut could hurt

James Sung (left) and Joseph Marinucci (center) said Thursday that the health insurers they rate have strong capital and liquidity levels. (Photo: Allison Bell/TA) James Sung (left) and Joseph Marinucci (center) said Thursday that the health insurers they rate have strong capital and liquidity levels. (Photo: Allison Bell/TA)

U.S. health insurers are going through the new wave of policymaking storms in Washington with solid capital and liquidity levels, rating analysts said Thursday.

Joseph Marinucci, a senior director at S&P Global Ratings, and James Sung, an associate director at S&P, said that even some of the events that have looked like setbacks have been good for health insurer ratings. 

(Related: S&P Eyes Pension Risk Transfer Business)

Anthem Inc. recently gave up on efforts to acquire Cigna Corp., mainly because of antitrust concerns.

Inability to complete the deals may have been frustrating for the company executives involved, but it eliminated rating agency worries about deal-related financing and company integration problems, the analysts said.

Meanwhile, insurers' commercial group health insurance operations are growing faster than U.S. gross domestic product, and faster than insurers' U.S. life and property-casualty operations, the analysts said.

A few years ago, insurers might have worried about the potential for disruption caused by private exchanges, or by hospital-led health plans.

Today, however, private exchange programs are still not big enough to cause much disruption, and many hospitals are struggling to manage their efforts to take responsibility for the financial risk involved with providing health care, Sung said.

"One thing the hospitals have learned is that it's very difficult to run a health insurance business," Sung said.

Sung, Marinucci and other S&P analysts were speaking in a small breakout session in New York, at an S&P Global Ratings insurance conference.

S&P ratings on bonds and other fixed income investments help shape insurers' investments. S&P ratings on insurers affect how much insurers can charge for their coverage, and how much interest insurers pay when they borrow money. Although the number of people at the S&P conference health insurance session was small, the attendees appeared to include senior risk analysts and credit managers from investment banks and other major sources of corporate financing.

The S&P analysts acknowledged that the current Republican effort to change the Affordable Care Act is complicated, confusing and hard to predict. Top-level S&P analysts struggled to explain the Senate budget reconciliation process, which may govern what Republicans can get into an Affordable Care Act change law.

The analysts said one major question is the fate of the Affordable Care Act cost-sharing reduction subsidy program, which helps low-income users of the ACA public exchange system pay their co-payments and deductibles. Eliminating subsidy payments for 2018 might be a moderate problem, and any moves to cut off payments for 2017 coverage, for policies with premiums already locked in, could be a big problem, the analysts said.

Analysts at Milliman Inc. have estimated that the cost-sharing reduction subsidy program accounted for about $13 billion of the $206 billion in revenue insurers generated from U.S. individual major medical coverage from 2014 through 2016.

The S&P analysts seemed to be wary of the possibility that policymakers could take health insurer financial strength for granted and make moves that would lead to a big drain on health insurer capital levels.

Neal Freedman, an S&P director sitting in the audience, said, in connection with a separate discussion of health insurers' current balance sheet strength, that health insurers ended up with high capital levels going into 2014 partly because a sudden slowing in health care cost increases gave the insurers higher-than-expected profits.

For a health insurer, having a high level of capital can be useful for weathering problems, but, "once it goes, it's very hard to get it back," Freedman said.

--- Read Securities Analyst Fears Hidden Life Company Assumption Risk on ThinkAdvisor.

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