Fitch Ratings worries about the effects of the Affordable Care Act medical loss ratio (MLR) rules on individual health insurance sales, but it is feeling better about the overall state of the U.S. health insurance market.
Fitch, Chicago, has increased its outlook for U.S. health insurers and managed care 
companies to stable, from negative. The outlook has been negative since July 2009.
Fitch analysts talked about the outlook change Thursday during a teleconference.
Health insurers' earnings and capital levels look good, the analysts said.
But Fitch still has questions about the effects Affordable Care Act implementation will have on health insurers' margins and operating strategies in the short term, and on member behavior in the long term.
The Affordable Care Act is the federal legislative package that includes the Patient Protection and Affordable Care Act (PPACA). Republicans in Congress hope to repeal the act or use other strategies, such as withholding of appropriations, to block implementation.
For now, Fitch analysts are assuming the act will take effect roughly as written.
"While we expect that the changes taking place as a result of PPACA will have mostly an adverse effect on margins, earnings and
cash flow of companies operating in the sector, we view the changes as relatively manageable," Brian Ellis, a Fitch analyst, said during the teleconference.
For the Fitch analysts, the effects of the PPACA MLR provision are a primary concern, speakers said.
The MLR provision will require health insurers to spend 85% of large group premium revenue and 80% of individual and small group revenue on health care and quality improvement efforts.
The U.S. Department of Health and Human Services (HHS) recently reduced some of the uncertainty surrounding the MLR requirements by releasing MLR regulations based largely on recommendations developed by the National Association of Insurance Commissioners, Kansas City, Mo., the Fitch analysts said.
HHS helped insurers by letting them keep federal taxes out of the MLR denominator and put some quality improvement expenses in the numerator, the analysts said.
Regulators refused to exclude broker commissions from the numerator, and that could hurt sales in the individual market, the analysts said.
Fitch expects PPACA Medicare Advantage program funding changes to cause insurers to pull out of less profitable Medicare Advantage markets. But insurers should be able to avoid letting the changes hurt their credit metrics, the analysts said.
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