A consolidation movement could be developing among small health insurers in response to the demands of healthcare reform, a rating agency says.

Moody’s, New York, points to recent notifications that Blue Cross Blue Shield of Delaware, Wilmington, Del., signed an affiliation agreement with Highmark Inc., Pittsburgh, and that HealthSpring, Nashville, Tenn., agreed to acquire Bravo Health, Baltimore.

Both announcements cited the need for increased size to cut administrative costs and to work more efficiently in the new environment produced by healthcare reform, Moody’s notes.

Those moves are likely to have a positive or neutral impact on the credit ratings of companies involved, despite the increased debt, financing costs and risks historically taken on by companies involved with mergers, Moody’s says.

“Consolidation among small, similarly sized and product-focused companies will lead to market share improvement but with fewer integration risks,” says Steve Zaharuk, senior vice president of Moody’s, writing in its Weekly Credit Outlook. “Nevertheless, a significant increase in the amount of debt could still be negative to a company’s credit profile.”

Health insurers are feeling demands to reduce administrative costs to remain profitable and competitive and meet minimum medical loss ratio requirements that are scheduled to be effective in 2011 under health care reform, he points out.

“Small, local and regional healthcare insurers will find meeting those challenges more difficult in an environment requiring investments in new products and technology. As a result, we anticipate these smaller companies will seek partnerships through affiliations or mergers,” Zaharuk states.

Federal regulators have said they would be less likely to approve mergers or acquisitions that would reduce competition and choices for consumers. That means that larger national health insurers would not be ideal partners for a consolidation, Zaharuk says.

“Instead, the expectation is that smaller companies with similar product offerings and operating philosophies will join together, especially, as in the cases of the two recent announcements, when the companies do not share overlapping marketing areas,” he observes.

tt