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Fitch: PPACA May Hurt Margins

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Because of the effects of the new health bills, Americans probably will get more health care in coming years and pay less for the services they use.

Analysts in the Chicago office of Fitch Ratings Ltd. have published that prediction in a commentary on the possible effects of the new Patient Protection and Affordable Care Act and H.R. 4872, the Reconciliation Act of 2010, a PPACA “fixer bill” which appears to be well on its way to becoming law.

PPACA and H.R. 4872 could squeeze the Medicare Advantage private Medicare plan program, Fitch analysts write.

PPACA and H.r. 4872 would freeze program payments in 2011, and they would start cutting reimbursement levels to 95% to 115% of traditional Medicare levels in 2012, the analysts write.

“Consequently, reimbursements will be lower in denser urban areas with larger Medicare populations and higher in more rural counties with few seniors and providers,” analysts write.

The highest-quality plans will get a 5% incentive payment, but a 85% medical loss ratio minimum would be enacted starting in 2014, analysts write.

Even before PPACA was signed into law, changes that require Medicare Advantage private fee-for-service plans to use provider networks caused some companies to scale down or shut down Medicare Advantage programs, the analysts write.

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.”


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