ACA & The New Normal

Considerable Change Ahead for U.S. Health Insurers​

Fitch: There is potential for meaningful disruption on the horizon

A new report from Fitch Ratings considers the ‘unsustainable’  rise in costs

Chicago-18 November 2019: Considerable change is ahead for U.S health insurers as the healthcare landscape evolves and politicians look to address rising costs, according to a new report by Fitch Ratings.

“While change in the U.S. healthcare system is nothing new for insurers, we see few indications that it will subside in the near future,” said Brad Ellis, Senior Director, Fitch Ratings. “As healthcare costs continue to increase at an unsustainable pace, the risk of disruption from regulation increases.”

U.S health insurers have always dealt with a shifting healthcare landscape due to ongoing advances in medical treatments, emerging infectious diseases, pharmaceutical discoveries, innovative and less-invasive medical devices and procedures, imaging technology, information systems, regulation and legislation.

From HMO to Health-Outcome Insurers

Insurers mostly have been successful at managing these changes, but it has resulted in a significant evolution of the U.S healthcare landscape from the growth of managed care and HMOs in the 1970s and 1980s to the more modern health outcome-focused insurers formed by horizontal and then vertical integration.

The sector’s wave of horizontal and vertical mergers generated significant cost efficiencies and improved integration of care, but also significantly increased financial leverage and intangible assets. In the five years prior to year-end 2018, the six largest publicly held health insurers increased outstanding debt from $48 billion to $119 billion, most of which was used to finance integration. The risk of higher leverage is partially offset by a better ability to predict and accurately price morbidity risk into premiums.

Despite this evolution, Fitch believes transformative change is possible in the current political environment as rising healthcare costs have eroded public resistance to policies like Medicare-for-all. While current political plans are light on detail, the implications of such a policy could include financial strain on the overall healthcare system.

Excerpts from ‘Managing Change in an Evolving Health Insurance Industry’

Healthcare is among the most rapidly changing industries in the world due to the multitude of new and old health issues facing society and the emerging innovations to manage them. As the primary financers of healthcare, health insurance companies face similar levels of constant change in order to keep pace with medical advances and manage the payment mechanisms required for the provision of expanding and increasingly costly healthcare services.

The involvement of health insurers in the management of healthcare has greatly intensified over the past four to five decades in response to rapid increases in cost. In recent years, health insurers shifted their focus to some degree from managing current cost through methods such as preauthorization of expensive care, to increasingly focusing on the effectiveness of current care in preventing incidences of higher levels of care, such as in-patient hospitalization.

As the primary financers of healthcare, health insurance companies face similar levels of constant change in order to keep pace with medical advances and manage the payment mechanisms required...

An aging population and lifestyle choices that lead to high-cost chronic illnesses, as well as revenue protection measures taken by members of the healthcare delivery sector, have compelled health insurers to respond with offsetting measures. Until recent years, local and regional market strength garnered through consolidation within the healthcare delivery system was met with a significant amount of horizontal consolidation of health insurers. In recent years, however, health insurers have embarked on vertical integration strategies to gain more control over the delivery of healthcare services.

Both horizontal and vertical consolidation in the health insurance sector has led to a substantial increase in financial leverage and intangible assets on the balance sheets of many health insurers. Fitch Ratings believes that risks associated with these changes have been partially mitigated by improved capabilities around the prediction of the healthcare cost trends to which the sector is exposed and a consequent stronger ability.

Access the full report here.