Moody’s Investors Service, a major rating agency, is responding to Patient Protection and Affordable Care Act (PPACA) changes by looking harder at how steady health carriers hold their medical loss ratios.

Moody’s, New York, describes the change in a U.S. health insurer rating methodology update. The update replaces a 2007 health insurer methodology.

The minimum medical loss ratio (MLR) provision in PPACA now requires U.S. health insurers to spend 85% of large group revenue and 80% of individual and small group revenue on health care Caduceusand quality improvement efforts or else provide rebates.

Moody’s uses a total of five factors to rate health insurers: market penetration and brand; product risk and concentration; capital adequacy and quality; profitability; and financial flexibility.

In the past, Moody’s included an adjusted MLR sub-factor in the profitability factor.

Now, Moody’s is replacing the adjusted MLR sub-factor with the MLR standard deviation for the past five years.

The more the MLR changes from year to year, the bigger the standard deviation will be.

Moody’s would like to see the highest-rated U.S. health insurers have an MLR standard deviation of less

than 0.25 percentage points; it expects to see the lowest-rated U.S. health insurers to have an MLR standard deviation greater than five percentage points.

Moody’s also will be using new earnings and product diversity information to calculate ratings; in the past, the rating agency simply looked at the percentage of earnings coming from government programs and the percentage of earnings coming from non-health care products.

Now, Moody’s will look at the average standard deviation between a rated company’s earnings and the average earnings of a well-diversified company

In the future, “we anticipate ultimately adding a third layer of stress analysis specifically related to health care reform, particularly as new regulations are written and implemented over the next few years,” Stephen Zaharuk, the author of the methodology report, says in a statement.

The new stress analysis will be applied selective, and Moody’s does not now expect the methodology update to lead to any changes in public ratings, the rating agency says.

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