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Lower health insurer profits here to stay?

Lower health insurer profits here to stay?

Deteriorating profits for publicly traded health insurers' commercial business could be the “new norm,” according to a report by rating agency A.M. Best Co. Inc.

To grow earnings, health insurers tracked by Best are shifting away from commercial business and focusing on Medicare and Medicaid, Oldwick, New Jersey-based Best said in its “Publicly Traded Health Insurers Increase Revenues, Operating Earnings in 2015” report released Wednesday.

Profits for health insurers' commercial segments have been shrinking for the past several years as the health reform law's public health insurance exchanges weigh on net income, according to Best, which recently downgraded the health insurance industry's rating outlook to negative from stable.

According to a September report by Best, health insurers who participated in the public health insurance exchanges “reported an aggregate underwriting margin of minus 0.7% in 2014, continuing the declining trend since 2011.”

Conversely, “non-exchange players reported a continued positive commercial underwriting margin of 1.4% in 2014,” the September report stated. That's the second-lowest margin experienced over the last 10 years for those companies, Best said.

Still, according to the new report released Thursday, the 12 publicly traded health insurers tracked by Best recorded 14.3% revenue growth through year-end 2015.

Overall commercial enrollment for the 12 publicly traded health insurers tracked by Best increased 0.7% year-over-year for 2015 compared with 5.0% in 2014. A decline in enrollment in employer-based group plans was offset by enrollment growth in the exchanges, Best said.

Enrollment in Medicare Advantage for the 12 publicly traded insurers grew 6.5% in 2015, compared with 7.6% in 2014; and Medicaid enrollment grew 13.8%, down from 26.7% in 2014, according to the report.

“A.M. Best believes that future margin expansion is not likely, and that the lower overall margin on commercial business is the new norm for the industry,” the report states. “Medicare and Medicaid are growing business segments in the health insurance industry and causing insurers' business mix to shift away from commercial accounts.”

Though enrollment in public health exchanges lags behind what was initially expected, those who did enroll skew older and sicker than what insurers are used to and are weighing heavily on earnings.

The report notes that many insurers mispriced the plans they sold on the public health exchanges in 2015 — the second year of the exchanges — due to limited available data on the population.

UnitedHealth Group Inc., the most vocal health insurer critic of the Affordable Care Act's health insurance exchanges, threatened to drop out of the exchange business in 2017.

“It will be interesting to see if there is a domino effect related to UnitedHealth's decision to possibly exit the health insurance exchanges launched by the ACA in the coming months and how that could affect the rest of the industry,” Best said.

To pad earnings, health insurers are diversifying their insurance products and expanding where they operate “to have a more balanced business profile and to better absorb a downturn in a particular sector or region,” according to the report.

The biggest examples include the proposed mergers between Aetna Inc. and Humana Inc., and Anthem Inc. and Cigna Corp., which will provide greater diversity of products and scale for the insurers, according to the report, which did not address antitrust and other regulatory hurdles faced by the insurers.

Health insurers are also expanding to include nonregulated businesses, like technology operations, pharmacy benefit managers and private exchanges.