S&P Predicts Future Health Insurer Profitability

Despite any impact the recession might have on revenue and earnings growth this year, U.S. health insurers are expected to take steps during 2009 to restore their former profitability, analysts at Standard & Poor’s Corp. predict in a report issued Tuesday, March 17.

New York-based S&P revised its outlook for U.S. health insurers to negative in November 2008 because so many insurers’ earnings were falling far below projections due to underestimation of medical cost trends, an unanticipated change in business mix and inadequate pricing of some Medicare Advantage and Part D prescription drug programs, the New York-based ratings agency reported.

As a group, the 37 insurers S&P monitors reported 2008 earnings that were approximately 25 percent less than estimates.

In addition to raising premiums for certain lines of coverage, health insurers also will trim their administrative overheads, according to S&P, which pointed to recent layoffs at Bloomfield, Connecticut-based Cigna Corp. and Indianapolis-based WellPoint Inc. as examples.

Those health insurers are cutting 4 percent and 3.5 percent, respectively, of their workforces and are closely monitoring their budgets, Medicare payment rates and the potential impact that national health reform might have on their margins after 2009, S&P analysts said in the report, “Will Profits Rebound for Health Insurers in 2009?”

“For the 37 health insurers in our database, 2008 earnings were about 25 percent below the estimates we made this past year,” said Standard & Poor’s credit analyst Neal Freedman in a statement. “In all, 19 health insurers ended up cutting their own 2008 earnings forecasts.”

Of that group, S&P lowered ratings on seven, revised the outlooks to negative from stable on three and affirmed ratings with a stable outlook on the remaining nine, Freedman noted.

S&P also is paying close attention to the business mix at Minnetonka, Minnesota-based UnitedHealth Group Inc. and Woodland Hills, California-based Health Net Inc., where enrollment rates at small or midsized employers were less than expected for 2008.

“Lower-than-expected enrollment in the fully insured, commercial, small and midsized group was a significant contributor to earnings shortfalls in 2008,” the S&P report said.

S&P attributed much of insurers’ earnings shortfalls in their Medicare business to adverse selection caused by enrollment of beneficiaries more likely to take advantage of the benefits available.

“We consider insurers that have significantly increased their Medicare Advantage or Medicare Part D enrollment … as potentially falling prey to adverse selection,” the analysts’ report noted.

S&P’s report on U.S. health insurers’ future profitability is available to RatingsDirect subscribers at www.ratingsdirect.com, or it can be purchased by calling (212) 438-9823 or by sending an e-mail to research_request@standardandpoors.com.

Filed by Joanne Wojcik of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.