Public Option Could Make Winners, Losers Of Health Insurers: Moody’s

The creation of a public option would be a significant long-term challenge for the U.S. health insurance industry, since it could potentially weaken earnings for health insurers, depending on how it is crafted.

That was the word from Moody’s Investors Service, which released a report on how a public option would affect health insurers’ profitability. Democratic presidential candidate Joe Biden said he favors a public option to compete against private health insurance.

“The creation of a government-funded alternative to commercial health insurance remains the largest risk facing the industry in the longer term,” Moody’s assistant vice president Stefan Kahandaliyanage said in the report. The details of any public insurance option would be crucial, he added, with the impact on private insurers depending on how many individuals previously covered under private insurance would be both eligible for a public plan and likely to switch to it.

Moody's also pointed out that some insurers — such as those focused on Medicare, Medicaid and the individual market — could have additional opportunities under certain versions of health care reform.

Popular support for a public option has been building for more than a decade, Moody’s said, and the possibility of legislation creating a public plan will likely extend beyond the Nov. 2 election. A public option that hinders competition through benefit design or nonmarket pricing would weaken earnings for many of Moody’s rated insurers. More expansive proposals, such as a single-payer option, would have a proportionally larger impact on health insurers.

Near-Term Policy Risks

Near-term, election-related policy risks for health insurers could lead to reduced earnings and higher uncertainty, Moody’s said. Joe Biden has proposed expanding the Affordable Care Act and creating a public option that could reduce earnings for some health insurers, but improve earnings for others.

Meanwhile, the Trump administration and 18 state attorneys general have brought a lawsuit before the Supreme Court that could cause the Supreme Court to strike down the ACA, disrupting insurers' ACA marketplace and Medicaid expansion businesses. The Trump administration has not released a detailed plan for replacing the ACA should it be overturned.

Near term, Moody’s said, health insurers could also face public scrutiny after two profitable quarters in 2020, when medical usage fell off as a result of the COVID-19 pandemic. Additionally, the pandemic has drawn attention to the U.S. uninsured population, and a slow economic recovery or a second wave of the virus could increase the number of uninsured.

Long-Term Profitability Risks

In the longer term, proposals to transform access to health care pose a key risk for insurers’ profitability, Moody’s said.

A more expansive public option, such as a single-payer model, could weaken U.S. health insurers’ profitability and destabilize the employer-sponsored market, Moody’s said. A more limited public option targeting primarily the individual market, which is small, would affect our Moody’s rated companies far less.

As health care costs rise, regulatory pressure to limit rate increases could threaten earnings. In recent years, U.S. health insurers have taken steps to contain health care costs, but still costs continue to rise. Health insurers can maintain profitability by adjusting premiums, but regulators could limit premium increases for government-sponsored business and thereby hurt profitability.

Who Wins, Who Loses?

Moody’s said that if either the public option or expanded Medicare eligibility is enacted, this would reduce earnings at companies with large commercial insurance business segments because more working-age individuals could choose to leave their private employer-sponsored plans in favor of the public option or expanded Medicare.

However, the exact effect at each company would depend on their business mix, and specifically whether those individuals leaving employer-sponsored plans are currently in administrative services only for fully insured arrangements.

Further, many employers, particularly large ones, pay most of the premium for their employees, which could mitigate the potential for these individuals to switch to the public option.

Companies with high commercial membership concentration and that are less exposed, or not very competitive, in Medicare and Medicaid stand to lose the most, Moody’s said.  Generally, Moody’s rated Blue Cross Blue Shield health insurers have high membership concentration in both fully insured and ASO commercial business and have relatively less exposure to government programs.

This makes them more vulnerable to policy risk. On the publicly traded side of Moody’s rated U.S. health insurers, Cigna also has high membership concentration in ASO commercial business and relatively less exposure to government programs.

Although UnitedHealth, Anthem and Aetna - the three largest U.S. health insurers as measured by membership - also have sizable commercial exposure, they do have large, competitive Medicare and Medicaid businesses, which helps diversify policy risk.

Under a Biden plan, the health insurers that would generally stand to gain are those with greater concentration in government programs such as Medicare and Medicaid, as well as those that participate in the individual marketplace. Humana is an example of a health insurer with high membership concentration in Medicare, while Centene is an example of a health insurer with high membership concentration in Medicaid and a leading share in the individual market.

Some insurers stand to gain under Biden’s plan, Moody’s said. The reported cited Centene, Molina and Health Care Service Corp. as carriers that would benefit under Biden’s plan, which would expand ACA enrollment, assuming a Biden administration defends the law, by eliminating the income cap on subsidy eligibility, increasing subsidies to cover a greater share of the costs, restoring Obama-era support for enrollment navigators and extending open enrollment periods.

Should any public insurance option be more limited in nature and seek to expand access to health care by directly competing with private insurance plans in the individual health insurance marketplace, there would be limited negative effects on health insurers’ earnings, Moody’s said..

Under such a limited proposal, only the 20 million enrollees in the individual market (and perhaps a small share of the 30 million uninsured) would be eligible for public insurance.

Moody’s said only those companies with outsized membership exposure to the ACA would be negatively affected. The private, employer-sponsored market, which currently covers 150 million individuals, would see little effect.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].