Health insurers see earnings growth in 1Q, Moody’s reports

Average earnings growth before interest, taxes, depreciation and amortization growth in the first quarter of was 3.7% among seven publicly traded health insurers, according to Moody’s Investor service.

However, excluding investment income and realized gains or losses, which have been weakened by market conditions, the earnings growth among those insurers was actually up 10.3%, Moody’s said.

Enrollment growth was strong in Medicaid and Medicare Advantage. Enrollment growth was partly offset by increased medical costs, reflecting the COVID-19 omicron variant and increasing use for care unrelated to COVID-19. Moody’s continues to forecast 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 improved leverage.

Moody’s also reported:

Medicaid enrollment will decline once the public health emergency expires. Since the pandemic began and a PHE was declared, states have suspended Medicaid eligibility reviews. As a result, Medicaid enrollment has increased 23% or 16.3 million to 87 million since the pandemic, boosting earnings for Medicaid insurers. It is now estimated that approximately 10% of current enrollees will no longer qualify when the PHE expires, possibly in July, and eligibility reviews resume.

At-home COVID-19 testing costs lower than expected. In 2022, health insurers were required to cover at-home testing costs. There were concerns that this could increase medical costs. But Moody’s reported that has not been the case, based on their discussions with health insurers. The cost of the at-home test is significantly lower than in-office testing, and to date, the frequency has been lower than the companies expected. It has not been a driver of medical costs.

Individual market subsidies still set to expire at year-end. Pandemic-related individual market subsidy increases are set to expire at year-end 2022. These increased subsidies helped push individual market enrollment to a record 14.5 million for 2022, a 2.5 million person increase from the previous year. Without new legislation to extend these subsidies, Moody’s said it expects much of the enrollment gains to reverse.

Greater scrutiny of mergers and acquisitions by the Department of Justice could slow consolidation. The Biden administration has called for increased scrutiny of corporate consolidation in several industries, including health insurance. Along these lines, in February 2022, the Department of Justice sued to block UnitedHealth’s acquisition of Change Healthcare. Consolidation has been a key strategy to expand capabilities and better control costs. Consolidation can also increase leverage, which can be credit negative.

A stable outlook for 2022 with improved earnings

In December, Moody’s affirmed a stable outlook for the health insurance sector. Earnings growth in 2021 was muted for the companies Moody’s surveyed, reflecting elevated COVID-19 costs exacerbated by the delta and omicron variants.

Despite the weaker growth, Moody’s said, health insurers' credit strength was largely unaffected. In fact, the growing diversification of the industry with the increasing investment in unregulated health services has boosted companies' credit strength, despite incrementally higher leverage.

For 2022, Moody’s continues to forecast earnings growth to pick up based on lower COVID-19 costs, better performance in the individual market and better commercial trends, barring a sharp economic reversal and as long as growth continues in Medicare Advantage.