Has The Cycle Peaked For Group Health?

New forms of competition. Defined contribution health plans and health savings accounts offer new coverage alternatives, increasing the pressure on traditional plans to cut rates in order to retain existing market share.

Selective aggressive underwriting. Many carriers have indicated a desire to be “selectively” aggressivean approach that, in the aggregate, has a negative impact on premium levels. It doesnt take much pressure against the thin medical insurance profit margins to turn a profitable block into a big loser.

But even with these clouds on the horizon, some fundamental changes in the industry lead us to believe that a downward cycle is not certain and that if one does occur, it will be briefer than in the past. One change is that many carriers have implemented or are looking at desktop information management tools that will boost managements ability to identify and react to even slight changes in medical cost and pricing trends. The trend models used at many carriers today also are more robust, including information from predictive models and improved linkage with provider contracting areas.

Also, unlike at the start of the last down cycle, the health insurance industry today is dominated by for-profit carriers. Its unlikely that Wall Street will be as willing to accept an extended period of losses to maintain market share, as often occurred when the industry was driven by not-for-profits. This is a major reason why any downturn will be substantially shorter.

Finally, as part of the 2003 Medicare legislation, many providers received a bump in their Medicare reimbursement levels that should make contracting with providers easier for carriers. Many of the profitable periods in the cycle have coincided with periods when Medicare reimbursement levels were favorable to providers. The “survival pressure” release for providers that comes with improved Medicare reimbursement levels generally flows downstream into easier commercial contract negotiations. This increases the probability that the more aggressive pricing trends currently being used by many carriers may be realized.

We believe that, in the short term, these favorable factors may outweigh indicators pointing to reduced profitability. However, pressures relating to increased surplus levels for not-for-profits and growth for for-profits may overwhelm the favorable factors in the long run.

Darrell Knapp is a principal in Ernst & Youngs Insurance Actuarial and Advisory Services practice in the firms Kansas City, Mo., office. He can be reached via e-mail at [email protected].

Reproduced from National Underwriter Edition, August 12, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.