Free at-home COVID tests add uncertainty to cloudy A&H outlook, report says

The resurgence of COVID-19 has raised some of the same concerns at the start of 2022 that U.S. carriers engaged in the accident and health insurance market hoped to have moved beyond.

S&P Global Market Intelligence's newly released U.S. Accident and Health Insurance Market Reports addresses these issues and other drivers of the industry's near- and intermediate-term outlook.

Add federal government proclamations to cover costs of up to eight at-home, COVID-19 tests per covered individual per month to a long and growing list of pandemic-related risk factors facing carriers in the U.S. accident and health market. That development, which the Biden administration intends as a way to help reduce the spread of the highly transmissible omicron variant, came as disability insurers braced for additional COVID-19 related claims, major-medical providers observed higher levels of hospitalizations, and utilization rates reemerged as a focal point in certain other niches with some providers temporarily halting elective procedures.

Our outlook for 2022 and beyond, as a result, incorporates multiple moving parts: the likelihood that 2020 growth rates will serve as a near-term high-water mark given a pandemic-related surge in Medicaid business and that 2020 incurred claims rates will serve as a floor, characterized by historically depressed utilization in certain lines. Many uncertainties loom, including the precise timing of an end to the federal public health emergency that has swelled Medicaid enrollment levels, the potential for adverse morbidity to lead to higher claims due to delayed and deferred care, and unknowns regarding the frequency and severity of the post-viral syndrome commonly known as "long COVID."

Not a zero-sum game

The Biden administration declared Jan. 10 that private health insurers and group health plans must either cover costs up front or provide reimbursement for up to eight at-home, over-the-counter COVID-19 tests per covered individual per month, effective Jan. 15. The projections contained in the U.S. Accident and Health Insurance Market Report were developed prior to that action, but early carrier feedback suggests a lesser net impact than one might assume from an initiative that could conceivably lead to coverage of tens if not hundreds of millions of kits.

Cigna Corp. CEO David Cordani, speaking at an investor conference on Jan. 11, suggested that costs of the initiative might be at least partially mitigated by a potential decline in more acute outcomes through earlier detection of infections and the avoidance of costlier lab tests. Based on a hypothetical average cost for an at-home test of $12.00 or $12.50, apiece, Cordani said that "you could consume 10 to 15 [over-the-counter] tests to offset the cost of 1 lab test." Further, the CEO said, Cigna had observed "meaningfully lower" acuity since the onset of the omicron variant as measured by the conversion of positive cases to hospitalizations.

UnitedHealth Group Inc. Executive Vice President and CFO John Rex, speaking during the company's Jan. 19 earnings conference call, said that inpatient hospitalization levels for the company's members have been similar to those it experienced in January 2021. But, Rex added, the increase this time around has come at a time during which national COVID-19 case rates are about 4x higher.

"For those people needing inpatient care, severity is seemingly lower as we are seeing shorter lengths of stay compared to that earlier period," Rex said.

A temporary drop in medical utilization rates could also help offset the additional cost burden from the at-home tests. Rex reported that UnitedHealth observed a 10% decline in primary care visits and an even larger reduction in specialist visits in recent weeks in what he described as "familiar correlations of care activity patterns to other periods of elevated infection rates experienced over the past two years." S&P Global Market Intelligence data show that what UnitedHealth labeled as "abatement" has varied widely by business line since the onset of the pandemic in March 2020.

UnitedHealth notably affirmed 2022 EPS guidance that executives issued during a Nov. 30, 2021, investor day at the start of the omicron surge.

Our outlook for the major medical lines through 2025 assumes that the ratio of incurred claims to premiums earned will remain above the low levels the industry achieved in 2018 and 2020. We also assume an acceleration in premium growth in 2022 and 2023 to incorporate, among other things, expectations for rising underlying increases in the cost of care as well as some migration of Medicaid beneficiaries to private plans. The latter development would be dependent upon state redeterminations of beneficiary eligibility when and if the federal public health emergency ends. It most recently was extended on Jan. 14.

A morbid outlook?

Despite a growing body of evidence that omicron is less severe, if more widespread, than previous variants of the virus, the impact of the outbreak is likely to carry negative implications for certain elements of the A&H market.

Comments from OneAmerica Financial Partners Inc. Chairman, President and CEO J. Scott Davison during a Dec. 30, 2021, webinar hosted by the Indiana Chamber of Commerce implied troubling developments in his company's group benefits business that predated the emergence of omicron.

Davison noted that death rates primarily among people ages 18 to 64 increased 40% in the third quarter of 2021 and into the fourth quarter of 2021 relative to pre-pandemic levels. A one-in-200-year catastrophe would have provided a boost of only 10%, he noted.

"Deaths that are being reported as COVID deaths greatly understate the death losses among working-aged people from the pandemic," Davison said. "It may not all be COVID on their death certificates, but deaths are up just huge, huge numbers."

In the long-term disability business, OneAmerica has been seeing an increase in claims that Davison suggested might be due to "long COVID” and an inability of insureds to obtain necessary health care because "the hospitals are overrun." OneAmerica expects to incur costs well in excess of $100 million related to the higher claims in what Davison described as the company’s smallest business. At the group level, according to an S&P Global Market Intelligence consolidation, OneAmerica reported incurred claims of $131.6 million in its group disability lines in 2020.

Several insurers, including Unum Group, had reported elevated short-term disability claims due to COVID-19, but "long COVID" has lurked as a potential challenge for the industry.

Guidance from the U.S. Department of Health and Human Services indicates that "long COVID" can be deemed a disability under the Americans with Disabilities Act to the extent that it incorporates a physical or mental impairment that substantially limits one or more major life activities. In addition to various physiological conditions associated with "long COVID," the department indicated that it may be characterized by lingering emotional illness and other mental health conditions.

The individual and group short- and long-term disability incurred claims ratio spiked to a four-year high of 75.1% in 2020. Although our outlook assumes the ratio will remain above 2017 through 2019 levels for the period from 2022 through 2024, it assumes a less bearish near-term outlook for the long-term disability business than the one Davison offered in the webinar.

Methodology

Historical results and projections are based on the Accident and Health Experience Exhibits of insurance companies' 2020 annual statements for carriers that file property and casualty, life and health, and managed care statement blanks. Key data points in the report generally reflect a sum-of-the-parts analysis of disclosures for 37 distinct business lines as well as rollups for the individual and group lines. Results for 2021 should be considered projections as A&H exhibits for the year are due in most jurisdictions on April 1.

The sum-of-the-parts approach includes distinct modeling of outlooks at the sector level for each business line that are based to varying extents on the following: disclosures in quarterly statements, certain line items on the Supplemental Health Care Exhibit of annual statements, the content of earnings reports and SEC filings by leading market participants, anecdotal commentary, and other publicly available sources.

We make various assumptions regarding future business conditions, including developments related to accounting standards, regulation, government appropriations and legislation, with a general bias toward a return to the longer-term trends and away from overweighting current circumstances in a highly volatile time.

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}