Health insurance has been a key topic during the 2016 U.S. Presidential campaign. Now with a President-elect in place, we can have an early indication of the potential impact on the U.S. health insurance market. S&P Global Ratings views the immediate impact to be increased uncertainty around the future structure of the individual and Medicaid insurance markets in the country. The concept of "repeal and replace" has been core to President-elect Trump's campaign platform, indicating a potentially significant scale-back of several aspects of the Affordable Care Act (ACA). At this time it is not clear what "replace" will look like. Some parts of the ACA may continue in a modified form, while others will be repealed. It is the lack of specific details on the replacement plan that creates uncertainty in the near term.
- We are not taking any immediate rating actions on our rated U.S. health insurers as a result of the Presidential election. Longer-term credit impact, if any, will depend on specifics of the replacement plan, each insurer's line of business exposures, and mitigating strategies adopted by them to offset any disruptions to their respective markets.
- In the longer term, "repeal and replace" may reduce the size of the ACA individual market and limit future growth in the Medicaid market.
- As a result, the national uninsured rate may increase, but we don't see it reverting to pre-ACA levels. This is because we expect some form of replacement to be implemented along with modifications or repeal of major components of the current law.
- In terms of timing, we expect "repeal and replace" to be a 2018 (not 2017) event.
A longer-term impact will depend on the specifics of the replacement plan. In our view, the individual and Medicaid markets could be most affected. As a result, the uninsured rate (currently at historic lows) may increase based on the magnitude of the final changes. But we don't expect the uninsured rate to reach pre-ACA levels. This is because we expect, in our base-case scenario, some form of replacement after a possible repeal of the current law.
We expect insurers that have the benefit of diversification to be less affected in the long term. Insurers that lack adequate scale or are heavily concentrated in business lines that may be affected by "repeal and replace" may face revenue or earnings volatility based on the replacement plan.
Financing, Financing, Financing
One of the key areas that the new administration will likely focus on is the financing of health care. Based on some proposed alternative plans, financing may shift to a more defined contribution method (e.g., block grants) from the current method of financing--which includes subsidies (advanced tax credits) for the ACA exchange enrollees and federal matching for Medicaid. Depending on the relative size of the contribution, this can lead to higher cost-sharing by the consumer, a concept that is already being increasingly used in the commercially insured marketplace.
Individual And Medicaid Lines Of Business Likely Most Affected By Potential Changes
In an attempt to quantify the impact, we looked at health insurers' premiums from their different lines of businesses (LoBs). The largest premium contributor is the group/employer-based LoB. In terms of earnings, the group business has been relatively the most stable, whereas the individual business has been most volatile of late (see chart).
We believe that individual (non-government) and Medicaid LoBs will be affected most and group and Medicare Advantage LoBs are least likely to be affected by future replacement plans.
Individually Insured: Subsidies And Individual Mandate Will Be Key
The past few years have seen significant growth in the individually insured premiums for health insurers. This was driven by the implementation of the different aspects of the ACA, including the income-based subsidies, marketplace, guaranteed issues, and individual mandate. Replacement or repeal of these aspects may change the dynamics of the individual marketplace.
Currently over 9 million individuals receive a subsidy based on their income status. This population is somewhat hedged from premium rate increase and we have assumed, in our base-case enrollment forecast, that the majority will re-enroll in the ACA exchange for 2017. The possible elimination of subsidies (with no equivalent replacement) will reduce the affordability of healthcare plans and result in a significant decline in the number of individually insured in the U.S.
The individual mandate has always been a contentious aspect of the ACA. If the individual mandate is repealed, but guaranteed issue (in the current form) is maintained, it is detrimental to the risk pool. The mandate in its current form wasn't as effective as it needed to be both in terms of the actual penalty and enforcement. But the complete absence of a mandate, in our view, will likely further deteriorate the risk profile of the individual pool (especially without greater protection against off-cycle enrolment).
We expect the full impact of any structural changes not to be felt on the marketplace until 2018. But, due to the uncertainty of the future model of health insurance, individuals may be less likely to sign up for this current, ongoing open enrollment. We had earlier forecasted year-over-year enrollment to range between a decline of 8% to an increase of 4%. (Assuming an average enrollment for 2016 of around 10.5 million, our forecast for effectuated ACA exchange enrollment is 9.7 million–11 million for full-year 2017.) Based on current events, we expect a greater likelihood of ending at the lower end of our range than at the higher end. The decline could be greater than our downside if the uncertainties around the future of the exchanges completely overshadow the current open enrollment season.
Medicaid: Change In Financing Will Be Key
Currently, 32 states (including DC) have expanded Medicaid. We believe that that none of the remaining 19 will expand Medicaid for the time being. Future Medicaid financing will be a key driver to any expansion or contraction of the program. Block grants may be an option to finance Medicaid in the future. Depending on the size of the contribution, this can lead to higher cost-sharing by the consumer or reduced benefits.
Medicare Advantage Is Less Likely To Be Affected
We do not believe reforming the Medicare program will be a key near-term priority of the new administration given its popularity with seniors. We believe the Medicare Advantage (MA) market, in particular, will continue to be one of the clearest, most certain growth areas for health insurers. However, we also believe that Medicare program reform could come into the picture if broader budgetary reform is considered. Potential changes could include long-standing proposals such as making Medicare a "premium support" program, changing the MA bidding system, or adjusting Medicare age eligibility.
Commercial Group/Employer Insurance Least Likely To See Changes
Most of the insured in the U.S. still get their insurance through their employers. For insurers, group (employer-based) insured premiums have been the largest contributor (about 30%) of total insured premiums. This business line has also been the most consistent earnings contributor. We don't expect any changes to this business line in our base-case scenario.
But in an alternate scenario, one area of the employer-based insurance that has been discussed is the tax subsidy provided for this coverage. As per the Congressional Budget Office (March 2016) estimates, about $155 billion of federal subsidy/benefit was provided to employment-based coverage. Any significant reduction in this subsidy could hurt insurers' group line of business. This business line would be most affected if the current federal subsidy/benefit is effectively reduced to fund a potential ACA replacement plan for the individual/Medicaid markets.
"Too Early To Call"--The Final Results For U.S. Insurance
The full market effects will depend on specific details of the replacement plan. Our views currently highlight the uncertainty in the near term and potential for large-scale changes to the Medicaid and individual markets (together over $200 billion in premiums).
In terms of timing, given the possibly significant changes to ACA and the complexity of implementing a new plan, we expect "repeal and replace" to be a 2018 (not 2017) event. 2017 will be influenced by uncertainty, but large-scale structural changes to U.S. health insurance will likely not be implemented before 2018. Generally, gradual changes to market rules that provide insurers time to adopt and prepare are the least detrimental to credit quality. In our base case, we assume that will be the course for "repeal and replace." Any sudden and immediate change could create volatility for health insurers and the marketplace as a whole.
|U.S. Medical Membership|
|(As of Sept. 30, 2016, by segment)|
|(000s)||Rating (holding company long-term issuer credit rating and outlook as of Nov. 10, 2016)||ACA exchange||Total individual||Total commercial (incl. individual)||Medicaid expansion||Total Medicaid||Total Medicare||Other||Total medical membership|
|Triple-S Management||BB+/Stable (financial strength rating of operating company)||N/A||N/A||522||N/A||402||114||0||1,038|
|WellCare Health Plans**||BB/Stable||0||0||0||N/A||2,426||338||0||2,764|
|By segment (% of total)|
|Triple-S Management||BB+/Stable (financial strength rating of operating company)||N/A||N/A||50||N/A||39||11||0||100|
|WellCare Health Plans**||BB/Stable||0||0||0||N/A||88||12||0||100|
|*Other includes FEP. ¶Other includes TRICARE, correctional, and behavioral. §Total Commercial includes TRICARE. **Total Medicaid and Total Medicare include dual-eligibles. N/A-Not applicable. Sources: SEC filings, earnings call transcripts, S&P Global Ratings estimates.|