Health Sector Outlook Rosy, Raters Say

Historically strong and sustainable operating margins contributed to Standard & Poor’s positive mid-year outlook for the health insurance sector.[@@]

The move represented an upgrade from stable.

“Bolstering this perspective is a moderation in the cyclical nature of the industry’s earnings and a generally firm price environment,” the report stated. “Counterproductive price competition exists only in selected geographics and products.”

The report also said that “relative calm” prevails in the political and regulatory environment.

Consolidation continues in the industry with 10 of the largest companies accounting for 59% of the commercial membership.

“The large diverse, companies have broad national or regional reach, which has positioned them better in the marketplace,” the report stated. “These large firms enjoy a more favorable ratings potential than the smaller players, whose size geographic concentration leave them more vulnerable.”

S&P analyst Shellie Stoddard noted that the consolidation along with the proliferation of managed care practices have help to level out the big profit swings. “These improvements include pricing discipline and accuracy, negotiated medical costs, quicker claims processing and technological innovations,” she said.

Medical management programs have also improved profitability as insurers gain more skill in controlling chronic conditions such as diabetes, heart disease and asthma. “Plan members with such long-term ailments use the most health care services, and better managing their treatment will decrease overall costs,” Stoddard said.

However, over the next two to three years, the public portion of health care – Medicare and Medicaid – will reintroduce volatility into the underwriting cycle. “Uncertainty surrounding government reimbursement leaves pricing in these public programs vulnerable to government budgetary issues,” Stoddard said.

In addition, specialty companies focusing the government niche may continue to price competition, Stoddard added.