Moody’s predicts a stable outlook for publicly traded health insurers

Third-quarter earnings results for the publicly traded health insurers rated by Moody’s Investors Service were similar to the prior quarter, with strong net investment income on the positive side and continued higher usage in Medicare Advantage on the negative side.

Overall, average year-over-year earnings before interest, taxes, depreciation and amortization growth for the group was 13%, and was 8% excluding the impact of net investment income from both periods, Moody’s reported. Earnings were also supported by improved individual market performance and higher levels of commercial enrollment than Moody’s had anticipated in its 2023 outlook. Overall, membership has grown despite the ongoing Medicaid redetermination process.

Notable events

2024 star ratings positive for Aetna and negative for Centene. The 2024 star ratings for Medicare Advantage were released in October. The star ratings have important financial implications because higher rated plans get better reimbursement from the government. Nationally, star ratings changed little from last year, but there was variation among Moody’s rated companies.

Aetna saw significant improvement with 87% of members now in 4 star plans or better, up from 20% last year, while Elevance had a large decline to 35% from 64%. Centene showed some improvement, but overall results remain poor.

GLP-1 drugs are promising hope but at a high cost. GLP-1 drugs have been generally prescribed for diabetes but have shown great success in facilitating weight loss, so demand is building. However, they are very expensive. CVS Health noted that it would cost $1 trillion if all people that were clinically obese were prescribed one of these drugs. In the case of UnitedHealth, prescriptions for weight loss are currently 20% of total prescriptions. Health insurers can include these costs in policy prices.

However, for corporate clients who contract with health insurers for administrative services only and otherwise self-insure, the risk is higher, especially if usage is not effectively controlled.

Medicaid redeterminations process almost halfway done. As of early November, at least 10.1 million Medicaid enrollees have been disenrolled. Approximately 71% were disenrolled for procedural reasons, and many of those will be re-enrolled when paperwork is completed. As expected, this is somewhat reducing the earnings growth rate of the health insurers Moody’s rates, but it is only one of several drivers of this trend.

Moody’s expects that most of those who were disenrolled from Medicaid will re-enroll in the individual market or in employer-based insurance. The redetermination process should be completed in the May 2024 time frame.

Medicare Advantage usage remained high in Q3. Medicare Advantage usage spiked in Q2 2023, primarily as a result of outpatient procedures. The trend stabilized in Q3 but did not get better. The companies have been able to incorporate this trend into pricing for next year. Centene was an exception with a lower Medicare Advantage medical loss ratio in Q3 2023 versus last year.

A stable outlook for 2023 despite slower expected earnings growth

Moody’s 2023 health insurance outlook is stable, despite the forecast of slower EBITDA growth in the mid-to-high single digit range down from 12% in 2022. Results are broadly in line with Moody’s outlook expectations, but not entirely in line with their predicted reasons. Moody’s outlook was premised on reduced membership as a result of Medicaid redeterminations and the impact of a possible recession on commercial membership. However, with no recession this year, commercial membership has been better than expected, but its growth has been offset by higher-than-expected Medicare Advantage usage.

Although Medicaid redeterminations are underway, their impact so far has been relatively small. Year-to-date EBITDA growth through Sept. 30 was 10.6%, but only 4% excluding the benefit of improved net investment income, which was driven by higher interest rates. Meanwhile, Moody’s had expected incremental improvement in individual market results, and the individual market is performing even better than Moody’s had forecast.