Costs of Care

Affordable Care Act still presents health insurers with many unknowns

Moody’s: Numerous risks, unknowns persist

New York, September 10, 2014 — A year after its launch, the business of selling individual health  policies from the Affordable Care Act’s (ACA) public exchanges still comes with numerous risks and unknowns for health insurers, says Moody’s Investors Service. Chief among these risks was the
requirement to submit premium rates for 2015 before credible financial data on polices sold in 2014 became available.

“Due to remaining uncertainties and unresolved issues with respect to the profitability of policies sold under the ACA, consumer behavior, and the legal status of subsidies, insurers are faced with making pricing decisions for 2015 with limited claims data in a competitive marketplace ripe for irrational pricing,” says Moody’s Senior Vice President Steve Zaharuk in the new Moody’s report.

But will it stick?

Another major unknown with respect to 2014 enrollment is how many of the reported 8 million enrollees—which exceeded official projections—will retain their coverage for the full year. Moody’s says the concern is especially pressing over the reported 29% of policies purchased by those in the 18-to-29 age group.

“The risk is that as the monthly premium bills become a financial annoyance, especially for those not receiving a premium subsidy, and as individuals realize they will be unlikely to meet the high policy
deductibles, many may lapse their polices before the end of the year,” says Zaharuk.

Given the premium increases seen with 2015 policy submissions, it is also likely some of the younger, healthier individuals may decide not to repurchase in 2015, lowering the quality of the risk pool.

Halbig vs. Burwell

Moody’s notes there also remain legal uncertainties over the federal subsidies, as a result of the recent D.C. Circuit Court of Appeals ruling in Halbig v. Burwell. Although the case is being reheard and may
ultimately reach the Supreme Court, the court’s initial finding that the ACA does not permit the IRS to subsidize individuals who buy health insurance on the federal exchange, would be problematic for insurance companies.

In terms of credit quality, Moody’s does not expect these challenges to materially hurt the overall credit profiles of its rated insurers, given that the exchanges make up a small relative share of their overall

Despite all the uncertainties and poor projected financial results for these products in 2014, insurers are planning on continuing their participation on the exchanges in 2015. However for many of the larger
health insurers, expansion plans are relatively modest.