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What S&P is saying about PPACA and the Blues

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Most of the U.S. Blue Cross and Blue Shield companies have more than enough capital to handle the Patient Protection and Affordable Care Act (PPACA) squeeze, but, eventually, the squeezing could hurt their ability to pay back loans.

Deep Banerjee and other credit analysts at Standard & Poor’s Ratings Services have given that assessment in a commentary on how PPACA has affected the 37 Blues companies.

What rating analysts at S&P and other rating agencies think about the Blues matters to health insurance producers because credit ratings affect whether insurers can get capital from investors, and how much they have to pay for the capital. That, in turn, affects what insurers can do and how much customers trust the insurers to pay claims. 

Members of the Blue Cross and Blue Shield Association now provide or administer health coverage for 105 million people. Many of the companies supported the health reform policy debates that eventually led to the passage of PPACA and the creation of the PPACA public exchange system, the PPACA Medicaid expansion program, the PPACA health insurance subsidy programs, the PPACA medical underwriting restrictions, and the PPACA individual and employer “shared responsibility” provisions, and the 

See also: WellPoint plans exchange plan push

In most states, Banerjee and the other analysts say, the Blues ended up with a dominant share of the PPACA exchange qualified health plan (QHP) enrollees.

For now, based on the results of the open enrollment for 2014 coverage, the PPACA exchanges “might as well be called ‘Blue Exchanges,’” Banerjee and his colleagues write. Deep Banerjee

The Blues “will reap the benefits or suffer the consequences of being early adopters,” the analysts write.

See also: Blues may rise or fall with exchanges

PPACA fees, underwriting rules and benefits requirements also affect the products the Blues sell outside the exchange system.

For more about the S&P analysts are saying about PPACA and the Blues, read on. 


1. Most of the Blues have thick capital cushions

In some states, regulators have argued that the Blues have so much capital they ought to give some of the capital back to policyholders.

More than 70 percent of the Blues S&P rates have enough capital to qualify for a AAA-level rating, based solely on capital, the analysts say.

The companies hold relatively low-risk investment portfolios, and they have adequate financial flexibility, the analysts say. 

See also: CO-OP enrollees may face $500,000 guaranty fund cap

Randomly varying bar chart bars

2. Profitability levels vary widely

Although the Blues have strong finances, their level of profitability varies widely, and their return on revenue fell sharply between Sept. 30, 2013, and Sept. 30, 2014, the analysts say.

In 2013, for example, the S&P-rated Blues’ median pretax return on revenue was 2.6 percent, but the actual returns at individual companies ranged from a loss of 2.5 percent to a gain of 7.8 percent.

Major PPACA provisions and programs came to life Jan. 1, 2014. During the third quarter of 2014, the median pretax return on revenue dropped to 1.5 percent, from more than 4 percent in the third quarter of 2013.

See also: Managed Care Cos.’ Net Income Plunged In ’98

Man on a tight rope

3. Low one-digit profit margins leave little room for error

“Some of the Blues had priced aggressively on the exchanges to maintain their strong positions in the individually insured marketplace,” the analysts say. “Although the strategy worked when it came to membership gain, with most Blues coming away with the vast majority of members that signed up in their respective regions, it may have come at the cost of weakened underwriting performance.”

In the long run, the Blues will have to defend their margins against the PPACA squeeze or face the possibility that the changes could affect their credit quality, the analysts say.

See also: Managed Care Companies Increase Margins