As medical cost trends continueto rise, the health sector has enacted cost-containment strategiesthat have blunted the impact of cost increases. (Photo:Getty)

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Moody's Investor Service has issued a relatively glowing reporton the U.S. health insurance market, predicting stabilityand earnings growth for insurers in 2019. Despitecontinued public anxiety over health insurance reforms, Moody'sanalysts noted that currently, the Affordable Care Act (ACA) isworking well for insurers in the US.

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“Our stable outlook for US health insurers is based on ourexpectations of solid earnings growth, reflecting disciplinedmedical management, stable medical cost trends, and modestmembership growth,” the report said. “The industry has adjusted tothe ACA, and ACA plans have been profitable overall in 2018, whichwe expect to continue.”

Insurers benefit from booming economy

The report noted that the overall strong economy is boosting theinsurance industry, because increasing numbers of employedAmericans result in more members paying into employer-sponsoredplans. At the same time, analysts said, medical costs have beencontained, so insurers can expect seeing growing income andpredictable expenses in the near future.

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Related: 4 reasons employer-sponsored health insurance won'tgo away

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“Economic growth accelerated in 2018, with solid job growth anda record level of job openings,” the report said. “Moody'sInvestors Service forecasts US real GDP growth in 2018 of 2.9percent, which is among the strongest over the past decade. This,in the near term, should support and perhaps modestly improveorganic medical enrollee expansion in the group commercialsegment—the industry's largest business, representing roughly 55percent of medical membership in the US.”

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However, the report added, it is unclear if this growth issustainable in the long term. The Moody's analysts forecast lowerGDP growth in 2019, averaging just under 2 percent. And the reportsaid medical inflation is expected to continue to outpace GDPgrowth.

Medical costs growing, but under control—for now

The report said that as medical cost trends continue to rise,the health sector has enacted cost-containment strategies that haveblunted the impact of cost increases. Insurers have seen increasedearnings in 2018 due to these strategies, the report said.

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“This reflects continued growth in medical costs overall,featuring much better performance in the ACA exchange businesses,including favorable prior period development, and cost-cuttingefforts at a number of companies. We expect solid earnings tocontinue in 2019 with base earnings growing in the mid-to-uppersingle digits,” the report said.

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However, the moderating cost trends might change due toprescription drug prices. Moody's said the industry is expecting asurge in the introduction of relatively expensive specialty drugproducts over the next few years. “The anticipated increase,reflecting an unusually strong drug pipeline and a large number ofrecent FDA approvals, will likely outpace the number of brand-namedrugs going off-patent, which could drive up drug expenditures andpush the medical cost trend higher,” the report said.

A changing health care system

Overall, the health care system is making changes that encouragea more value-based approach—in other words, paying for the quality,rather than the quantity of care. The report said that thisapproach, plus trends like mergers and acquisitions, has broughtmore efficiency to health care delivery.

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The report also expects growth of Medicare Advantage plans,which has both benefits and risk for insurers. And Medicaid plansare expected to expand in several states, due in part to the recentmidterm elections, which increased the number of Democraticgovernors. “Further Medicaid expansion is a credit positive for theindustry, although it is unclear which companies would benefit,”the report said.

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