A.M. Best on Court Ruling: No Effect on Most Health Insurers But Watching Small Insurers

June 28, 2012

Insurance rating organization A.M. Best Co. says the U.S. Supreme Court upholding the Patient Protection and Affordable Care Act (PPACA) will not have a ratings impact to the majority of health insurers.

However, A.M. Best said it is maintaining a negative view on smaller companies that specialize in the small group and individual health sectors over concerns about profitability due to the law’s minimum loss ratio requirement.

A.M. Best said many carriers have diversified over the past few years and offer products to multiple segments, including individual, employer groups and government-sponsored (both Medicare and Medicaid managed care), which provides for more diversified membership, revenue and earnings.

Furthermore, several of the largest carriers have expanded with supplemental business that is more service oriented and non-regulated. A.M. Best said these complementary products provide health insurers with varied sources of earnings and cash flows, which can enhance sustainability of operating results.

However, A.M. Best said it has concerns about profitability for smaller companies that specialize in the individual and small group markets, which typically have a lower medical loss ratio and a higher administrative expense ratio.

“PPACA has a requirement for a minimum medical loss ratio, and while these carriers have reduced broker commissions, their lack of economies of scale may impact their ability to lower administrative expenses enough to comply and remain profitable,” said the ratings firm.

“Furthermore, these companies tend to have less diversified product portfolios than those of larger carriers, and could be more negatively impacted by the implementation of exchanges in 2014,” the firm said.

A.M. Best said it will be following up in the near term with additional commentary.

The medical loss ratio provision in the law requires insurers to spend at least 80 percent of the premiums they collect on medical care and quality improvement or return the difference to consumers and employers. The Kaiser Family Foundation estimates that policyholders will receive more than $1 billion in rebates this fall due to the medical loss ratio provision.

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