Although health reform likely will cause some initial disruption to the health insurance industry, the addition of millions of new plan members could prove advantageous to insurers ultimately, some industry experts say.

However, until that day comes, insurers will be forced to streamline their operations to maintain minimum medical loss ratios set by the legislation while also meeting state solvency requirements and posting a profit for shareholders.

Also of concern are the effects of two new excise taxes—one assessed on insurers based on market share and the other assessed on high-cost health insurance products called “Cadillac” plans.

Insurers and analysts are concerned that the rate bands established by the legislation will not allow the pricing flexibility necessary for insurers to continue to offer affordable yet profitable insurance plans.

Analysts also expect insurers to eventually exit the Medicare Advantage market in response to changes in the payment structure under the Patient Protection and Affordable Care Act. On the other hand, insurers are likely to expand into Medicaid, which will grow as a result of the legislation. Under Medicare Advantage, insurers contract with the government to provide benefits at least equal to those in the traditional Medicare program. Medicare Advantage critics say the premiums the government pays insurers are excessive.

About 10 million Medicare-eligible beneficiaries are enrolled in Medicare Advantage plans, which typically are preferred provider organizations.

Meanwhile, analysts and insurers were uncertain how new state insurance exchanges, from which individuals and small employers will be able to obtain coverage, will operate and reserved judgment until after final regulations are issued.

Based on analysts' initial assessments, the margins of for-profit and publicly traded health insurers could erode moderately to enable them to meet minimum medical loss ratios set by the legislation. The new law requires insurers underwriting individual and small-group coverage to spend at least 80% of their premium revenues on medical care, while insurers providing coverage to large groups must spend at least 85% on medical care.

A lot depends on how the medical loss ratio will be calculated, said Sally Rosen, managing senior financial analyst at A.M. Best Co. Inc. in Oldwick, N.J.

“It appears they have not clearly defined ‘loss ratio' in the legislation,” Ms. Rosen said. Some insurers include disease management and other health management services in their medical loss ratios, while others do not and incorporate them into their administrative costs. As a result, the latter companies appear to be spending more on administration, she explained.

“We'll be watching over the next four to six months to see how medical loss ratio is defined, what the reporting mechanisms will be, etc.,” said Joe Marinucci, a primary credit analyst at Standard & Poor's Corp. in New York.

The delay in assessment of two new excise taxes—one based on market share, using premiums to define market share; and the other on the costliest “Cadillac” health plans—to 2014 and 2018, respectively, is a “net credit positive” for insurers, said Steve Zaharuk, senior vp at Moody's Investors Service in New York.

However, it is uncertain how much of the new taxes insurers will be able to pass along to consumers but still keep their products affordable, he said.

Because the premium tax is based on fully insured products business—not on self-insured or administrative services-only business—it will hit some insurers harder than others, Mr. Zaharuk added.

For example, Bloomfield, Conn.-based CIGNA Corp., “which has a huge amount of ASO business, won't get taxed, whereas a company that has a lot of Medicaid business and receives premium payments from states and the federal government will be taxed,” he said.

However, insurers with a large share of Medicaid business will not be able to pass this added cost on to those customers because Medicaid enrollees don't pay premiums, Mr. Zaharuk pointed out. Instead, they will either have to absorb the cost or pass it on to other customers in higher premiums.

“Insurers will be passing on this tax to the private payers—individuals and small employers,” he said.

Immediately after the legislation passed the House, Washington-based health insurer trade group America's Health Insurance Plans issued a statement warning that the tax would be passed on to consumers.

The weak mandate included in the legislation—individuals who do not purchase insurance will be forced to pay the lesser of $695 or 2% of income—also could have a negative effect on insurers' ability to offer affordable coverage, Mr. Zaharuk said.

In its statement, AHIP predicted that the “weak” coverage requirement will encourage people to wait to purchase health insurance until they are sick.

“Insurers fear that in a couple of years they'll have a pool of very sick people and they'll have to keep increasing premiums, which will be very unpopular. But they have to meet solvency requirements. Eventually they may stop selling individual insurance,” Mr. Zaharuk said.

The health insurance industry is continuing to protest the narrow rate bands included in the legislation. At most, insurers can charge three times the lowest premium for individuals based on age and geography, but not on health status. They can, however, charge tobacco users 50% more for coverage.

“The new age rating requirements will cause premiums to increase for people under the age of 30 by more than 50%,” AHIP warned.

The Chicago-based Blue Cross & Blue Shield Assn. had been advocating a 5:1 ratio, according to a spokesman.

The revised funding scheme for Medicare Advantage in the legislation is likely to result in lower margins and moderately lower market penetration levels for health insurers over the next one to three years, according to analysts. Health insurers controlled 23% of the Medicare market in 2009 after a rather strong, three-year expansion, according to S&P.

Moody's Mr. Zaharuk and S&P's Mr. Marinucci said they see the Medicare Advantage market contracting in response to the revised payment structure, similar to the mass exodus of Medicare+Choice plans that came after the federal government's funding cuts at the beginning of the millennium.

A.M. Best's Ms. Rosen sees insurers cutting back on optional benefits such as chiropractic care and/or charging higher copayments and deductibles to Medicare Advantage plan members.

Because the legislation expands Medicaid eligibility in most states, analysts forecast that more insurers will enter that market, some by acquisition of carriers that already have strong footholds in the market, such as St. Louis-based Centene Corp., Virginia Beach, Va.-based Amerigroup Corp. and Long Beach, Calif.-based Molina Healthcare Inc.

For some insurers, this could be a profitable line of business, analysts say.

“Although Medicaid is low-margin business” an expansion under health reform “could attract healthier people, and higher-income individuals tend to be healthier,” said Ms. Rosen.

Medicaid business also could be profitable for insurers if they can better manage care, suggested Mr. Zaharuk.

For example, the most expensive claims under Medicaid have been related to low birth weight and premature babies, but if insurers provide prenatal care to pregnant women, this could reduce this cost significantly, thereby making this a more profitable line of business for insurers, he said.

While Medicaid is a low-margin business for the most part, it is also high-volume, which should eventually be a boon to insurers, said Tom Weakland, managing partner in the health care practice at Diamond Management & Technology Consultants Inc. in Chicago.

“I think in the near term—between now and 2014—I would expect profits, revenue, margins to go down for most insurers because of the Medicare Advantage cuts, because insurers can't sell policies with lifetime caps, because they can't exclude children with pre-existing conditions or drop adults when they're sick,” he said.

“Before 32 million people come into the system, insurers are going to have to do lots of things that affect their profitability. Insurers need to operate more efficiently, cut down infrastructure costs,” Mr. Weakland said.

“But, in the long term, if we put 20 million to 30 million more people in the system, even at slightly lower margins, that's additional revenue coming in and I think that would be a good thing for health insurers,” he said.