A public option would dent private insurers' profits: Moodys
According to a new analysis from Moodys, “whatever the election's outcome, the most significant long-term challenge to the industry is policy and regulatory risk."
A new analysis by Moody’s Investors Service said that increased government regulation poses the largest long-term risk to profitability in the insurance industry. However, the report notes the industry is facing challenges on several levels: not only are lawmakers considering changes such as a public option, but the Affordable Care Act (ACA) could be repealed by an upcoming Supreme Court decision—creating disruption and uncertainty for insurers, employers, and consumers. And the ongoing COVID-19 pandemic has ongoing costs and risks for insurers’ bottom lines.
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“With many states reporting increasing cases of COVID-19 , health care is even more central to the policy conversation, and increasingly a topic of discussion ahead of the US presidential election,” the new report said. “Whatever the election’s outcome, the most significant long-term challenge to the industry is policy and regulatory risk, specifically legislation creating a public health insurance option that would compete with private insurance.”
Biden’s plan could hurt earnings
The analysis looks at a centerpiece of former Vice President Joe Biden’s approach to health care reform: the public option. The concept was originally considered and rejected as part of the Affordable Care Act during the Obama Administration. However, with continued issues around access and affordability, and significant public support for more dramatic reforms such as Medicare for All, the Biden campaign has revived plans for a public option, saying it would be more affordable for consumers and create pressure on insurers to lower costs.
The Moody’s report noted that rising health care costs have resulted in a growing demand for government interventions that would increase access to health care and improve affordability. “Popular support for such a policy change has been building for more than a decade, and the possibility of legislation creating a public insurance option will therefore likely extend beyond the near-term election,” the report said.
There are different levels of risk with such government interventions. A limited public option, restricted to the current ACA individual marketplaces, would carry a low risk to insurer earnings, the report said. A more expansive public option, which would extend to employer-based, commercial plans, poses a moderate risk. A single-payer, Medicare-for-all type plan poses an existential risk to the insurance market, with the most likely outcome being the elimination of private health insurance in the U.S.
Even if more Americans join the insurance marketplace through a public option administered by private insurers, regulators could limit premium increases, which would affect insurers’ earnings, the report noted.
Other risks: Ending the ACA, the ongoing pandemic
The report noted that another type of risk is looming—the Supreme Court is scheduled to hear a case against the ACA in November. This creates the possibility that the health reform law could be struck down, causing disruption in ACA and Medicaid markets, with likely consequences for employer-based plans as well. “The Trump administration has not released a detailed plan for replacing the law should it be overturned, raising significant near-term policy and operational risks for health insurers,” the report said. “Should the Supreme Court strike down the law, it would create uncertainty for individuals, as well as health insurance companies that have been operating under the law for a decade.”
Somewhat surprisingly, the COVID-19 pandemic has increased earnings for US insurers. “Earnings in the first half of 2020 were unusually high for our rated health insurers, as medical usage fell off sharply during the shutdowns in March, April and May, when many nonessential procedures were deferred and many individuals chose not to seek non-urgent, in-person medical treatment,” the analysis noted. This poses a different kind of risk, the authors write, because the insurance industry could be perceived as bringing in large profits at a time when Americans are stressed both by health concerns and economic slowdowns.
“The customer relations aspect is especially sensitive during an election year with so much political attention focused on health care affordability and coverage levels,” the report said. “Should there be a second wave of coronavirus infections in the fall accompanied by lower medical usage, continued high industry profits, economic stagnation and high unemployment adding to the 30 million uninsured, there could be even more intense social and political pressure on policymakers to address health insurance affordability and coverage levels.”
The authors noted that current trends are not encouraging, as the U.S. population is aging, and chronic health conditions continue to be a costly problem for the population at large. These trends have resulted in medical spending increasing at faster rate than inflation. “The burden of high medical costs in the US are not sustainable for individuals or society as a whole, and health insurers need to be part of the solution to containing costs,” the report said.
Some of the steps the health care industry is taking to address higher health care costs includes consolidation and a shift to value-based care. But even these steps may lead to a higher risk of government regulation, as policymakers may see consolidation moves as anti-competitive.
In a statement released with the report, Moody’s Assistant Vice President Stefan Kahandaliyanage said that the Biden public-option plan remains the most concerning risk to earnings in the health insurance field. “The creation of a government-funded alternative to commercial health insurance remains the largest risk facing the industry in the longer term,” said. “The details of any such public insurance option would be crucial, and a large part of the credit impact on our rated companies would depend on how many individuals previously covered under private insurance, in the employer-sponsored market, would be both eligible and likely to switch to a public plan.”
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