Outlook 'Stable' for Health Insurers in 2019 Despite ACA Uncertainty

A robust job market bolstering employer-sponsored plans, Baby Boomers transitioning to Medicare Advantage, and ACA exchanges attracting new payers are good signs for health plans in the coming year.

Despite the uncertainty over the future of the Affordable Care Act, the U.S. health insurance sector remains stable heading into 2019, according to a new analysis by S&P Global Ratings.

"A combination of still-favorable business conditions, financial factors, and diminished near-term legislative uncertainty balances our concerns relating to merger and acquisition activity, elevated policy risk, and re-emergent legal overhang," said S&P analyst Joseph Marinucci.

Strong job growth is bolstering commercial markets, aging Baby Boomers are driving Medicare Advantage growth, states are shifting their high acuity populations into managed Medicaid, and the ACA exchanges are stabilizing and attracting new competitors, S&P said.

"We assess capital and liquidity as strong or better for most of our rated U.S. health insurers, which supports balance-sheet strength," Marinucci said. "U.S. health insurers' operating performance reflects sustained earnings strength and improved earnings quality."

However, Marinucci said that profitability could moderate somewhat this year.

M&As remain a key rating factor, especially with larger transaction sizes, raising concerns about financial leverage, integration, and cultural compatibility. Consolidations, joint ventures, and partnering among larger insurers are defragmenting the sector, allowing the big insurers to build scale, "and create more touch points as the trend toward consumerism gains traction."

"This is making it harder for newer and smaller players to enter the market or sustain their presence," S&P said. "As a result, we continue to see larger health insurers taking a bigger share of the marketplace, and smaller players being displaced or struggling to achieve profitable growth as the competitive gap widens."

"Although the mid-term elections removed a good deal of legislative uncertainty for the industry, policy risk remains elevated given the administration's preference for ACA alternatives," S&P said.

In addition, S&P says that payment and delivery reforms mandated in the ACA around value-based care will continue to drive greater cross-sector collaboration among payers and providers.