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After a strong first quarter, health insurers can expect growth in profits and stable credit prospects, said Moody’s Investors Service.
Growth in average earnings before interest, taxes, depreciation and amortization in the first quarter was 3.7% among seven publicly traded health insurers, according to a new report by Moody’s.
But this includes investment income and realized gains or losses that have been weakened by market conditions. Excluding these factors, profit growth among these insurers has actually grown by 10.3%, Moody’s said.
Enrollment growth was strong in Medicaid and Medicare Advantage, but was partially offset by increased medical costs reflecting the COVID-19 Omicron variant and increasing use of non-COVID-19 care. The forecast is for low double-digit EBITDA growth based on lower COVID-19 costs and better market performance, which will contribute to a stable credit profile and improved leverage, the report said.
WHAT IS THE IMPACT?
Among other findings was that Medicaid enrollment would decline once the public health emergency expired.
After the pandemic began and was declared PHE, the states stopped Medicaid’s eligibility reviews. As a result, Medicaid enrollment increased by 23%, or 16.3 million, to 87 million after the pandemic, increasing Medicaid insurers’ revenue. It is now estimated that around 10% of those currently enrolled will no longer be eligible when the PHE expires, probably in July, and eligibility reviews are resumed.
The cost of testing COVID-19 at home is lower than expected, the report found. In 2022, health insurers had to cover the cost of home testing. There were fears that this could increase medical costs, but this was not the case, based on Moody’s discussions with health insurers. The cost of the test at home is significantly lower than testing in the office and to date the frequency is lower than expected by companies. This is not a reason for medical expenses.
Meanwhile, pandemic-related increases in individual market subsidies are expected to expire at the end of the year. These increased subsidies helped boost individual market enrollment to a record 14.5 million in 2022, an increase of 2.5 million compared to the previous year. With no new legislation to extend these subsidies, Moody’s said it expects much of its subscription profits to be reversed.
The report also found that greater control of mergers and acquisitions by the Ministry of Justice could slow consolidation. The Biden administration has called for tighter controls on corporate consolidation in several industries, including health insurance. For example, in February the Ministry of Justice filed a lawsuit to block UnitedHealth’s acquisition of Change Healthcare. Consolidation is a key strategy for empowerment and better cost control, but it could also increase leverage, which can be negative for credit, according to Moody’s.
THE BIGGER TREND
In December, Moody’s reaffirmed a strong outlook for the health insurance sector. Profit growth in 2021 was muffled for companies surveyed by Moody’s, reflecting increased costs for COVID-19, boosted by the Delta and Omicron variants.
Despite weaker growth, according to Moody’s, the creditworthiness of health insurers is largely unaffected. In fact, the growing diversification of the industry with increasing investment in unregulated health services has strengthened the creditworthiness of companies, despite gradually higher leverage.
For 2022, Moody’s continues to forecast earnings growth that will increase on the basis of lower COVID-19 costs, better market performance and better trade trends, except for a sharp economic turnaround and while growth continues in Medicare Advantage.