Fitch: PPACA May Hurt Margins

PPACA provisions that would effect individual and small group commercial plans, such as the ban on rescissions and lifetime benefit limits, and a requirement for first-dollar coverage of preventive services
“are unlikely to be critical issues and can be priced into premiums as the year unfolds and participants within this segment renew,” the Fitch analysts write. “Slightly more challenging for insurers is the implementation of the minimum medical loss ratios (MLR) and guaranteed issue, many details of which have yet to be worked out.”

If the government applies the 80% PPACA minimum loss ratio on a consolidated basis, it should not cause much grief, but the government could still find a way to apply that minimum loss ratio in a way that would cause much grief, the analysts write.

“If the government stipulates that the loss ratio must be calculated at the state level or at the statutory entity level, this element of the legislation becomes more onerous for insurers,” the analysts write.

Margins could shrink in the individual market, the analysts add.

The requirement to sell coverage on a guaranteed issue basis, with tight limits on variations in rates, could cause more problems, especially in the individual market, the analysts write.

“Fitch believes that it is not unreasonable to envision adverse selection overwhelming the individual segment of the market, driving many health plans from it altogether,” the analysts write. “This could become most acute under a scenario in which healthy, younger individuals decide to pay the penalty as opposed to purchasing coverage, and older individuals let policies lapse during periods when they do not need medical services, and purchase coverage only when they face a pending medical need, such as a surgery or expensive sets of tests or treatments.”