Health Insurers

Large U.S. Health Insurers Have Expanded Participation in Individual Insurance

Large U.S. Health Insurers Have Expanded Participation in Individual Insurance: Earnings derived from government operations, especially in the Medicaid sector, demonstrated robust performance, bolstered by heightened margins resulting from the ongoing Public Health Emergency (PHE) declaration and the absence of eligibility verifications.

Despite the commendable overall earnings in the first half of 2022, considerable unrealized losses exerted a negative impact on capital and surplus, offsetting approximately one-third of underwriting gains. With the prevailing trend in interest rates, the anticipation is that unrealized losses will continue to escalate into 2023. Additionally, the expected conclusion of the PHE and Medicaid redetermination is likely to temper Medicaid outcomes in the coming year.

The Revenue Challenge for Health Insurers

The conclusion of certain provisions is anticipated to pose revenue challenges for insurers with a significant stake in the Medicaid market. This is expected to coincide with a reduction in claims costs, as per Fitch’s analysis. On a positive note, many major health insurers have substantially expanded their presence in the individual market in recent years. This expansion is projected to partially mitigate the impact of the redetermination process on the operational performance of the health insurance sector.

Health Insurers

The Families First Coronavirus Response Act, enacted by Congress at the onset of the pandemic, mandated state Medicaid programs to maintain continuous enrollment during the designated COVID-19 PHE in exchange for increased federal funding.

Impact of the Consolidated Appropriations Act

A potential recession is viewed as a negative factor for the health insurance industry, given that job losses typically lead to declines in membership within the commercial segment. Conversely, Medicare Advantage and Medicaid are generally less affected by economic downturns and may even experience membership growth.

The Consolidated Appropriations Act passed at the end of 2022 established a sunset date of March 31, 2023, for the Medicaid continuous enrollment provision, gradually phasing out enhanced federal Medicaid matching funds by the end of the fiscal year 2023.

The Consolidated Appropriations Act, 2023, a $1.7 trillion omnibus spending bill, encompasses funding for various domestic and foreign policy priorities, including support for Ukraine, defense spending, and aid for regions affected by natural disasters.

States are permitted to resume disenrollments from April 2023 onward, subject to specific reporting and procedural requirements during the unwinding process. States have a 12-month window to determine current eligibility and two months to complete outstanding actions.

Medicaid Enrollment Growth

From February 2020 to March 2023, Medicaid/CHIP enrollment witnessed substantial growth, reaching 92.3 million by the end of 2022 and estimated to hit 95 million by March 31, 2023, amidst the ongoing coronavirus pandemic. The Department of Health and Human Services estimates that up to 15 million individuals covered by Medicaid and CHIP may lose coverage due to the redetermination process.

The extent of coverage loss will vary by state and depend on factors such as Medicaid policies, outreach efforts, and individual healthcare choices. Despite potential disenrollments, many individuals are expected to secure replacement coverage through state exchanges, partly due to the extension of ACA subsidies provided in the Inflation Reduction Act of August 2022.

Enrollment Composition and Potential Recession
Over the past decade, the enrollment composition of many health insurers has become more balanced, with improved diversification between commercial and recession-resistant government-funded business, such as Medicare Advantage and Medicaid. Commercial enrollment remains the largest segment for most major health insurers, providing a stabilizing effect on overall earnings.

Fitch identifies a growing risk of a mild recession in the U.S. during the second and third quarters of 2023. The potential rise in unemployment accompanying a recession is expected to lead to slower growth or modest declines in reported enrollment within the commercial segments of health insurers.

While health insurers typically do not disclose margin-level information on specific business lines, Fitch estimates that commercial insurance boasts the most attractive profit margins, followed by Medicare Advantage and Medicaid. Despite a more modest average Medicare Advantage rate increase in 2024, growth in this segment is anticipated to partially offset reduced earnings from Medicaid.

Downside risk from the redetermination process for insurers heavily exposed to Medicaid, such as Centene and Molina, may be mitigated by shifting disenrolled individuals to exchange products, increased enrollment from expanding state contracts, and efforts to reduce administrative expenses related to Medicaid.

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