U.S. health insurance companies had a significant upward turn in profitability in 2017 as net income more than doubled to $21.7 billion at third-quarter 2017 compared with $9.4 billion in the same prior-year period.
According to A.M. Best's 2018 Review/Preview special report, favorable operating performance of insurers' other lines of business helped to offset weaker - albeit greatly improved - earnings from the health exchange business.
The Best's Market Segment Report, titled, 'U.S. Health: 2018 Review & Preview,' states that despite sizable losses on Affordable Care Act (ACA) exchange business in recent years, operating performance has improved, driven by multiple years of high rate increases, combined with stability in membership. Premium growth has slowed as the large membership increases experienced in 2014 and 2015 from the exchange and Medicaid expansion have abated. The slower rate of premium growth, combined with higher earnings, has allowed risk-adjusted capitalization to improve. Still, many health plans have exited or scaled back their exposure to the exchanges due to the losses from this membership, and smaller carriers or ones heavily concentrated in this segment in particular have experienced significant negative impacts. Incremental regulatory changes targeting the ACA's structure were implemented in 2017, with further efforts expected in 2018. A.M. Best is concerned about the ability of smaller and less sophisticated carriers' ability to react to market changes.
According to the report, as the rate of growth for overall medical spending continues to rise, many health insurers are partnering or acquiring capabilities to diversify their operations and support members with coordinated services, i.e., one-stop shopping opportunities. A.M. Best expects this vertical integration of health care service companies, such as the announced CVS Health Corp.'s acquisition of Aetna, to continue. These types of acquisitions and partnerships may differ by size and scope, but contain common themes: delivery of health care; quality outcomes; data analytics; and, ultimately, cost savings.
The report also notes that average underwriting gains at non-public Blue Cross Blue Shield companies were very strong for the first nine months of 2017, growing to approximately $180.7 million compared with $16.4 million for the same period in 2016. Growth in the Medicare Advantage and Medicaid segments helped strengthen margins and earnings of the publicly traded national managed care carriers. For these insurers, net income grew year over year by 27% to $16.1 billion at third-quarter 2017.
A.M. Best revised its market outlook on the U.S. health insurance industry to stable from negative for 2018, as no significant deterioration in general market conditions is expected near term. The main challenge for insurers in 2018 will be not profitability, but revenue growth. The commercial group market has been static for several years. Similarly, the growth of the individual exchange product has been limited, owing to very high rates and low affordability. States that adopted the ACA have already implemented Medicaid expansion, and very few others are still considering expansion. Given the low chances of robust enrollment and a rise in revenue for these three segments, A.M. Best believes Medicare Advantage likely will be the main source of growth for the health insurance industry. The competition in this segment has intensified, as Blue Cross Blue Shield and regional plans have been developing capabilities to try to capture a larger share of that market.
To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record-code=270415 .
A.M. Best is the world's oldest and most authoritative insurance rating and information source.