The health insurance industry looks healthy and remains stable, according to an A.M. Best briefing. Despite the challenges, complexity and additional administrative costs associated with the Patient Protection and Affordable Care Act, insurers have adapted well, A.M. Best said, and the industry is strategically well-positioned. For 2014, A.M. Best expects top-line growth to be flat-to-up 5 percent.

Earnings for health insurers have remained positive, helped by lower utilization trends, which are below 2008 levels even considering claims volatility and flu season claims, A.M. Best said. And, lower utilization has resulted in higher levels of risk-based capital. However, commercial revenues likely will continue to decline, attributable to health insurance exchanges (HIX), some carriers exiting the market and the shift from fully insured to administrative-services-only contracts. That decline likely will be partially offset by growth in Medicaid-managed care, A.M. Best said.

HIX now are operational and many of the most challenging elements of Patient Protection and Affordable Care Act (PPACA), such as the development of essential health benefits, guaranteed coverage, and industry fee calculations, assessments and allocations have been performed, A.M. Best said. Insurers also have made systems modifications and filed new products and rates.

“[M]argins have been compressing over the past few years due to the additional strategic system and administrative expenses, as well as the minimum medical loss ratio (MLR) and new stricter rate-review requirements,” A.M. Best said.

Lower margins likely will persist in 2014 and ’15 following the release of the minimum MLR and the expected increase in utilization attributable to an influx of new customers, A.M. Best said. Additional factors pressuring margins include higher-administrative costs associated with HIX, product filings and customer inquiries. “Additionally, it is unclear if the new industry fee, effective in 2014 will be passed on in premium rates by all carriers,” A.M. Best said. “If not, earnings would also be significantly adversely impacted.”

For BCBS plans, operating margins also are expected to decline and range from zero to 2 percent, A.M. Best said. For publicly traded companies, A.M. Best said operating margins likely would be flat. Net income margin is expected to decrease, attributable to the non-tax deductibility of the PPACA health insurer fee.

The HIX rollout has introduced some uncertainty to the operating environment, such as uncertainty as to how many people will enroll via exchanges, and the risk brought by new enrollees, A.M. Best said. The ratings agency postulated that younger healthier people likely would avoid HIX enrollment because of the initial difficulties associated with enrollment and that less healthy people likely would rush to enroll, potentially affecting the risk pool negatively. The opportunity for states and companies to continue offering non-PPACA compliant policies also could negatively affect the risk pool, A.M. Best said.

Health insurers have expanded revenue and earnings sources by becoming more diversified geographically and on the basis of business-segments and become less dependent on the commercial segment, A.M. Best said. Many have expanded their segments to include Medicaid-managed care and Medicare, including prescription drug, Part D – Medicare Advantage and Medicare supplement; others are collaborating with or acquiring healthcare providers. “However, it is worth noting that government-funded business – such as Medicaid-managed care or Medicare Advantage – typically has higher loss ratios and lower margins,” A.M. Best said. “Furthermore, these programs often face state- and federal-budget cuts and program claw backs.”

Related content: Fitch: Health Insurance Outlook Stable

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