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After a strong first quarter, health insurers can expect earnings growth and a stable credit outlook, Moody’s Investors Service found.
Average growth in earnings before interest, taxes, depreciation and amortization in the first quarter was 3.7% among seven publicly traded health insurers, according to the new report from Moody’s.
But this includes investment income and realized gains or losses, which have been weakened by market conditions. Excluding these factors, earnings growth for these insurers actually increased 10.3%, Moody’s said.
Enrollment growth was strong in Medicaid and Medicare Advantage, but was partially offset by rising medical costs, reflecting the COVID-19 Omicron variant and increasing use of care unrelated to COVID-19. According to the report, the forecast calls for low double-digit EBITDA growth based on lower COVID-19 costs and better performance in the individual market, which will contribute to a stable credit profile and better effect. of leverage.
WHAT IS THE IMPACT
Among other findings was that Medicaid enrollment will decline once the public health emergency expires.
Since the onset of the pandemic and the declaration of a PHE, states have suspended Medicaid eligibility reviews. As a result, Medicaid enrollments have risen 23%, or 16.3 million, to 87 million since the pandemic, boosting revenue for Medicaid insurers. It is now estimated that about 10% of current enrollees will no longer be eligible when the PHE expires, possibly in July, and eligibility exams resume.
Costs for home COVID-19 testing have been lower than expected, the report said. In 2022, health insurers were required to cover the costs of home testing. Some feared it would increase medical costs, but it didn’t, according to Moody’s discussions with health insurers. The cost of home testing is significantly lower than in-office testing, and to date the frequency has been lower than companies had anticipated. It hasn’t been a driver of medical costs.
Meanwhile, individual market subsidy increases related to the pandemic are set to expire at the end of the year. These increased subsidies have helped push individual listings in the market to a record 14.5 million for 2022, an increase of 2.5 million people from the previous year. Without new legislation to expand those subsidies, Moody’s said it expects much of the enrollment gains to reverse.
The report also found that closer scrutiny of mergers and acquisitions by the Justice Department could slow consolidation. The Biden administration has called for more scrutiny of corporate consolidation in several sectors, including health insurance. For example, in February the Department of Justice filed a lawsuit to block UnitedHealth’s acquisition of Change Healthcare. Consolidation has been a key strategy to expand capacity and better control costs, but it can also increase leverage, which can negatively affect credit, according to Moody’s.
THE GREAT TREND
In December, Moody’s affirmed a stable outlook for the health insurance industry. Earnings growth in 2021 was moderate for companies surveyed by Moody’s, reflecting high COVID-19 costs exacerbated by Delta and Omicron variants.
Despite the weaker growth, Moody’s said, health insurers’ credit strength was largely unaffected. In fact, growing industry diversification with increased investment in unregulated health services has bolstered corporate credit strength, despite increasingly high leverage.
For 2022, Moody’s continues to expect accelerating earnings growth based on lower COVID-19 related costs, better individual market performance and better business trends, barring a sharp economic downturn and as long as Medicare Advantage continues to grow.