Health Insurers Navigate a Sea of Change

A report by A.M. Best describes how health insurers are responding to health reform. Many have diversified over the past few years, offering products to multiple segments, including individual, employer groups, and government-sponsored (Medicare and Medicaid managed care). They are also providing more diversified membership, revenue, and earnings.

In 2012, several large acquisitions led to diversification by segment and/or geography. Several of the larger carriers expanded with more service oriented and unregulated supplemental business. These complementary products provide varied sources of earnings and cash flow, which can enhance operating results.

Health insurers’ margins compressed during 2012 along with a modest rise in utilization. However, utilization remains relatively lower than in the past, but there was some regional variation. Medical cost trends have increased slightly.The minimum medical loss ratio (MLR) requirements and rate reviews have pressured earnings, as did a shift to government-funded programs with its lower margins. Carriers also have faced increased expenses due to the implementation of ACA. With open enrollment for exchanges set to start later this year, health insurers can expect costs to escalate throughout the remainder of 2013.

A.M. Best says the majority of health carriers will be able to adapt and maintain profitability, although it could be with lower margins, increased regulation, and uncertainty over state exchanges in the near-to-medium term. The ACA could lead to more competitive pricing, making it harder for smaller, more specialized carriers to compete. In January, A.M. Best had a stable outlook on the health insurance industry as a whole, but a negative view of smaller, more specialized companies in the individual and small-group health segments. A.M. Best has concerns about profitability, given the minimum MLR requirements.

Health insurers have been busy implementing ACA provisions, such as the MLR requirements and rebates. They are also preparing for health insurance exchanges, developing accountable-care organizations, and adopting the consumer-focused shift in marketing.

Over the past few years, health insurers have faced increased regulatory scrutiny, particularly on rate increases. According to HHS data released in September 2012, 36% of all rate increases were approved; 26% were modified and implemented; 12% were withdrawn prior to a determination; and 26% were deemed unreasonable or rejected.

The health insurance sector will continue to change as the market moves toward exchanges and transforms from an employer-focused market (business-to-business) to an individual focused market (business-to-consumer).

Multi-state carriers are assessing in which states they will offer products via an exchange. Some state-based exchanges have started reviewing applications from carriers. With open enrollment set to start in the fourth quarter of 2013, decisions need to be made in the next few months.

The health insurance industry must be ready for the multitude of changes. Many people will start purchasing health insurance through the exchanges in 2014 including some who have employer-based coverage today. Also, people could move between Medicaid and exchange products with subsidies, based on their income level. Carriers are reformulating their plans to incorporate businesses and products, looking at creating joint venture partnerships with providers and others, and preparing for new competitors.

Over the past few years, many carriers have diversified by offering products to multiple segments, including individuals, employer groups, and government-sponsored programs. Several of the largest carriers have expanded into supplemental lines of business. By offering these complementary products, health insurers gain a wide-range of regulated and non-regulated cash flow.

Cooperation among providers and health plans has also increased over the past few years. A notable example is the formation of accountable-care organizations (ACOs), which have grown exponentially. These entities include various providers, such a hospital and physician groups, and health plan based structures, with varying payment models. The goal is to improve the quality and coordination of care at the lowest cost.

As the cost of care escalates, and the government looks for ways to control the deficit, Medicare beneficiaries may be a test population for ACOs. While provider groups develop ACOs, health plans are evaluating their roles and testing ways to participate. Some larger health insurers are acquiring or partnering with provider groups or forming ACOs on their own. In some more cases, plans such as Highmark, have affiliated with a hospital system. However, A.M. Best does not expect many other health insurers to follow suit.

The ACA allows for federal funding of Consumer Operated and Oriented Plans (COOPs) that offer affordable healthcare solutions to small businesses and individuals. ACA provided several billion dollars of low interest loans to these entities. However, the funding was stopped as part of the fiscal cliff agreement passed in January 2013.

Government Programs

Over the past few years, health insurers have expanded or entered the market for Medicare Advantage and Medicaid managed care. The number of Medicare-eligible people is expected to rise steadily over the next decade. Furthermore, these retirees are more familiar with managed care products and may be more likely to choose a Medicare Advantage product. Medicaid managed care membership has grown steadily over the past few years due to the economy faltering; states switching or expanding Medicaid managed care programs to control costs; and states establishing managed care programs for the dual eligible population. Many states will expand the Medicaid eligibility up to 133% of the federal poverty level in 2014. As a result, more health insurers are interested in growing their presence in this market.

Medicare Advantage

Enrollment for Medicare Advantage plans has been exceptional at 10% from 2011 to 2012, according to the Centers for Medicare & Medicaid Services (CMS). Some of the top plans have consolidated. Market leaders include UnitedHealthcare with 19% of the market and Humana with 17%. PPO growth in this sector was 13.8% in 2012, and HMO-enrollment growth was 10.1%. However, enrollment in private fee-for- service plans (PFFS) declined 11.8% in 2012. Carriers are moving away from PFFS plans, mainly because of the Medicare Improvements for Patients and Providers Act, which requires them to provide provide a full or partial provider network in PFFS plan service areas.

Mergers & Acquisitions

Mergers and acquisitions accelerated significantly in 2012. The trend toward larger-scale acquisitions began in the fourth quarter of 2011 with announcements that Cigna Corp. was acquiring HealthSpring and UnitedHealth Group was acquiring XL Health. The majority of acquisitions involved government-sponsored business. Several larger transactions focused on increasing Medicaid managed care capabilities, such as WellPoint’s acquisition of Amerigroup. Also in 2012, Cigna’s acquired HealthSpring and Humana acquired Arcadian Management Services, which are multi-state Medicare Advantage companies.

The Medicaid expansion, which takes effect Jan. 1, 2014, is expected to generate substantial growth in the number of eligible people. In addition, due to budgetary pressure, more state governments are transitioning to Medicaid managed care. States are especially interested in cost-effective managed care solutions for the dual Medicaid and Medicare eligible population.

The trend toward acquisitions of Medicare Advantage companies and/or blocks of business continued in 2012. Large publicly traded companies are expanding their presence while smaller, local players are exiting because of a higher regulatory burden and potentially reduced margins. Managed-care companies have been building more comprehensive portfolios and expanding non-regulated revenue by acquiring healthcare related services, analytics, and technology companies. Aetna ’s acquisition of Coventry Health Care allows the company to expand into new regions and products. It also allows for revenue diversification of regulated and non-regulated business. UnitedHealth Group acquired Amil Participacoes S.A., Brazil’s largest health insurance company. The transaction is expected to offer growing revenue that is independent of U.S. economic conditions and regulatory changes.

A.M. Best expects mergers and acquisitions to continue, with emphasis on government-sponsored programs, such as Medicare and Medicaid, non-regulated services, and possibly integrated care delivery capabilities. Some smaller commercial carriers may exit the market, which creates opportunities for individual and group membership acquisitions. However, large-scale transactions are likely to decline in the near term.

Financial Earnings

Health insurers’ earnings remained quite favorable in 2012, although margins declined due to the following factors:
• The MLR requirement.
• Rate-review.
• Medical trends.
• A shift in business mix to Medicare Advantage or Medicaid managed care.

Most carriers are pricing products to fulfill the minimum MLR requirement. Combined with the rate-review process on individual and small-group products, this has led to a lower rate increases. While rate increases have slowed, carriers don’t appear to be pricing irrationally to win business.

Many health insurers have increased their presence in government-funded programs due to a lack of growth in commercial membership. Employer groups have shifted from fully insured to self-funded; there have been big enrollment increases in Medicaid managed care plans; and more people are aging into Medicare, which affects enrollment in Medicare Advantage.

While government-funded business is profitable and has larger premiums on a per-member basis, it remains a lower-margin business. Medicare Advantage reimbursement rates from CMS will decline in some geographic locations as rates move closer to fee-for-service parity. Medicare Advantage plans can offset some of this effect with the star bonus program. Under this program, CMS makes additional payments to insurers that achieve certain quality measures.

While Medicare Advantage and Medicaid managed care are lower margin businesses, these lines are not subject to the MLR requirement. Also, premium revenues grew 9.8% for publicly traded companies compared to 1.4% for the Blue Cross/Blue Shield group. Seven percent of publicly traded companies experienced double-digit premium increases; six saw increases of 20% or more. Cigna acquired a large Medicare Advantage plan in 2012, which drove the up premiums. Margins are expected to narrow in 2013. Health insurers are pricing products closer to the minimum MLR. Meanwhile, utilization is expected to continue increasing, but not significantly.

Many carriers’ need innovation and diversification to gain market share in the employee-benefit marketplace. Technological advancements like smart phone applications and web capabilities are becoming a differentiating factor that could generate sales.

Shift to Voluntary Benefits

Employee benefit carriers that have not sold voluntary coverage are cautiously entering the market. For example, the Principal recently added voluntary critical illness to its suite of products. This reflects the type of adjustments that are occurring throughout the industry. Employees want customizable benefits, flexibility in the amount of coverage, duration of coverage, and distribution of premium payments. The most popular coverage types are accident and critical illness. But hospital indemnity, limited medical benefit plans, and other similar supplemental medical plans are becoming increasingly successful due to gaps in major medical coverage and the fact that more consumers have high-deductible plans. Carriers have high expectations for near-term growth and success in the voluntary/worksite market. Offering a bundled package that includes integrated disability, absence management and wellness program is another form of market differentiation.

Disability Insurance

Many larger disability carriers have some wellness or absence management options available; smaller carriers may look to implement these as well, but would likely do so through outsourcing or partnering with other companies.The widespread increase in disability claims in early 2012 has moderated, with a few carriers still experiencing some volatility in certain pockets of business. To offset this, carriers are offering premiums by industry segment and geographic location. An aging workforce is not helping disability claims incidence. Disability insurers continue to lower discount rates to reflect the interest rate environment and have strengthened reserves. Many carriers have seen a significant shift in sales from true group coverage to voluntary and have offered more options and value.

Long-Term Care Insurance

The long-term care market is highly concentrated. The top 10 insurers account for about 90% of business. The largest writers of individual long-term care policies include Genworth, John Hancock, Mass Mutual, Mutual of Omaha, New York Life, and Northwestern Mutual. In a five-year period, 10 of the top 20 carriers have stopped selling long-term care policies. Prudential stopped offering individual long-term care policies last year, but will continue sales through employers and affinity groups.

Unum has discontinued long-term care sales while Guardian and MetLife placed their businesses in run-off. Many other companies, especially smaller to medium-sized carriers, struggle with managing older blocks of business or building sales. Several have limited participation in the long-term care market, have implemented substantial rate increases, or have exited this line.

Small to medium-sized carriers that have discontinued individual long-term care products over the past 24 months include CUNA Mutual, American Fidelity, Assurity Life, and the Wisconsin Education Association.

Given the aging U.S. population, there is a demand for affordable long-term care products. The Pension Protection Act of 2006 opened the door for hybrid products featuring long-term care riders. Numerous life/long-term care combinations have entered the market in the past few years, and development continues at a steady pace. Products with less generous benefits, shorter benefit periods, and life and annuity components are being offered.

Recently, John Hancock is offering a unique crediting provision that makes protection more affordable. The product features an alternative to the traditional inflation option as well as automatic increases in benefit and voluntary buy-up options. Benefits grow through an automatic crediting formula tied to a segment of John Hancock’s investment earnings, and there is no corresponding increase in premiums.

LIMRA has reported an increase in sales of individual long-term care policies through the first three quarters of 2012. A.M. Best sees the potential for sales to grow further since only 7% of eligible Americans have individual long-term care policies. Insurers are challenged by low interest rates, persistency, morbidity and the increasing cost of care.

In several cases state regulators have been slow or unwilling to approve rate increases. Also, with the extended low interest rate environment, long-term care writers are seeing low investment returns and more reinvestment risk. Also, policyholders are retaining coverage into later years when more claims are likely. Also, the costs of nursing home facilities and home health care continue to rise. These risks and challenges have caused many long-term care insurers to apply for significant rate increases, and A.M. Best expects this trend to continue.

Medicare Supplements

As Medicare supplement membership continues to grow, the environment remains very competitive. There has been more competition from larger, more aggressive national carriers in recent years, which has made it more challenging for small to medium-sized companies.

In recent years, carriers that have been more aggressive in pricing have sought larger than normal rate increases from regulators. A.M. Best says that more state regulators may be hesitant to allow large increases that affect senior citizens on fixed or limited incomes. This will pressure some carriers’ financial results. Over the past few years, several companies have entered or re-entered the Medicare supplement market. In 2011, Aetna acquired business from Genworth. In August 2012, Cigna acquired business from American Financial Group. In February, Cigna will start selling Medicare supplement plans underwritten by American Retirement Life. These transactions allow Aetna and Cigna to offer a range of products to the senior market, including Medicare supplement and Medicare Advantage.

Dental Benefits

Dental carriers have focused on the group/employer market. The majority of business has been in the employer segment. However, this is shifting with growth in voluntary dental products. Dental insurers have been expanding into the individual market.

Marketing to individuals will be important in 2014. It has yet to be determined whether dental carriers will be able to offer individual dental products through the exchanges. However, the definition of “essential health benefits” includes pediatric dental coverage. Dental insurers have been working with the states for the ability to offer pediatric coverage on the exchanges or to partner with health insurers on the exchange to provide these benefits. Dental insurers are working with the states and the federal government on exchange products. Financially, the dental insurance industry demonstrates strong operating capacity, with very favorable net premium leverage ratios of less than three times capital. The dental industry is capable of supporting a large influx of members. However, the availability of providers may fall significantly short in certain geographical areas.

Ratings Outlook

A.M. Best maintains a negative rating outlook for smaller, more specialized companies in the individual and small-group health segments. A.M. Best has concerns about profitability, given the minimum medical loss-ratio requirements and higher administrative expenses. This segment could be more exposed to competitive pricing, which would make it harder for the less diversified carriers to compete. As a result, small, specialized carriers could be affected more greatly by the loss of members in 2014, and may not have the scale to participate in the exchanges. These smaller, specialty companies could see more negative rating actions. However, A.M. Best says that the majority of health insurance carriers are well positioned for the challenges that lie ahead. For more information, visit

Last Updated 06/29/2022

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