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CCH® BENEFITS — 08/24/10

Health Care Reform Could Cost Health Insurers Far More Than Expected

from Spencer’s Benefits Reports: Compliance with the minimum loss-ratio requirement of the new health reform law could cost the nation’s health insurers far more than most analysts expected, according to a recent study by Weiss Ratings, a provider of insurance company ratings. Starting in 2011, the Patient Protection and Affordable Care Act requires individual and small group insurers to spend at least 80%—and large group insurers to spend at least 85%—of their premium dollars on medical care and on efforts to improve the quality of care (PHSA Sec. 2718). In addition, other provisions of the law, including requirements to cover certain groups with preexisting conditions, are expected to boost medical expenses.

Weiss found that insurers already complying with the loss-ratio requirement in 2009 had average net profit margins of only 0.7%, compared with 6.3% for non-compliant companies.

“As long as their investment incomes hold up, most large insurers should be able to handle the increased medical expenses expected under the new health care reform,” commented Martin D. Weiss, president of Weiss Ratings. “If investment income declines significantly, however, few insurers will be able to comply without debilitating impacts to their bottom line, and ultimately, their financial stability as well.”

To assess the effect of the reform on the health insurance industry’s earnings, the Weiss study covered 543 health insurers, distinguishing insurers that were and were not in compliance in 2009 with the new minimum loss ratio requirements:

Weiss found the following:

1. Including income from both their insurance underwriting operations and from their investments, the compliant companies earned a total of $1.74 billion, or an average of $5.5 million each. The non-compliant companies earned $7.68 billion, or an average of $34 million each.

2. Underwriting income, the difference between premiums collected and medical claims paid, is the income category primarily responsible for the sharp differences, Weiss noted. Consequently, Weiss concluded that as a group, the compliant companies lost $372 million on their insurance operations, with an average underwriting margin of a negative 0.2%. The non-compliant companies, on the other hand, earned $6.11 billion with an average underwriting margin of 5%.

3. The overall size of the insurer also was a factor because larger companies tend to have more investment income, making it possible for them to afford higher medical expenses per premium dollar, Weiss observed. However, despite size differences the contrast between the compliant and non-compliant groups was still great, as follows:

The net profits in the Weiss study are summarized in the following chart:

  Number Of Insurers Underwriting Profits Net Profits With Investment Income
    $ millions Margins (%) $ millions Margins (%)
All Insurers 543 5,736 1.6 9,419 2.6
Compliant 317 (372) (0.2) 1,741 0.7
     • Large 23 (464) (0.5) 883 0.9
     • Small 294 92 0.1 858 0.6
Non-Compliant 226 6,108 5.0 7,678 6.3
     • Large 13 2,265 5.4 4,135 9.9
     • Small 213 3,843 4.8 3,543 4.5

“Although the health care reform bill is expected to deliver significant benefits to consumers, Congress and state insurance commissioners should keep a watchful eye on the overall financial health of the industry, while consumers should be especially careful to do business with companies that have the wherewithal to promptly pay claims despite increased costs,” Mr. Weiss cautioned.

For more information, visit http://www.weissratings.com/healthlists.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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