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Health insurers cutting ACA businesses likely to see YOY Q3 earnings boost

Some of the largest health insurers are likely to see their earnings rise year over year in the third quarter thanks to their decisions to pull out of ailing Affordable Care Act exchanges, according to industry analysts.

Shedding ACA businesses that have been hounded by uncertainty have allowed most companies to focus on other lines of business, CFRA analyst Jeffrey Loo said in an interview. UnitedHealth Group Inc. disclosed plans to wind down its participation in ACA markets in July 2016 and Aetna Inc. announced its exit in May.

Of the nine health insurers reviewed in this S&P Global Market Intelligence analysis, seven are projected to see earnings per share growth year over year.

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Cost-sharing reductions, or payments the government makes to insurers to keep costs low for low-income or high-risk consumers, have been at the center of debate in Washington. The subsidies were intended to encourage insurers to enroll in the exchanges. The Trump administration had been making the payments, which were started under former President Barack Obama, on a month-to-month basis until it on Oct. 12 decided to cut them off entirely.

Uncertainty leading up to the White House's decision led Anthem Inc. and Molina Healthcare Inc. to use rate-making as a tool to keep the markets profitable. Although Anthem has been decreasing its ACA market footprint, both it and Molina have been offsetting cost increases by effectively negotiating higher rate increases for 2018, Loo said.

In Georgia, Anthem unit Blue Cross & Blue Shield of Georgia Inc. filed for an average increase of 57.5% if cost-sharing reductions are unfunded, while Florida approved a 71.2% average rate increase for Molina unit Molina Healthcare of Florida Inc.

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S&P Global Ratings Senior Director Joseph Marinucci said in an interview that, despite all of the legislative and policymaking murkiness, health insurers have stayed profitable this year.

"The big difference from year-end versus now is that we were skewing downside bias coming into 2017," said Marinucci. "There are more ratings now with stable outlooks than ratings with non-stable outlooks, there is upside bias."

Marinucci described two "drivers" of the rating agency's upside bias. The first is the unwinding of risk due to the failed megamergers of 2016 and improved operating performance in the exchange market.

"Without question, this is going to probably be the best year for these plans in terms of profitability in the exchange marketplace," Marinucci said. "Not that they're going to be achieving perfect margins yet, but they're not going to be losing money like they did in the first couple years, and even the third year."

For Anthem and Centene Corp., the exchanges represent a small portion of the companies' overall business, Marinucci said. In other lines of business, especially the government-sponsored sector of private Medicare and Medicaid offerings, the companies have done especially well and are projected to keep improving.

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Click here for a template featuring insurance companies' GAAP financial statement highlights. Template provides summary income statement, balance sheet, investment details and other exhibits for selected insurance company.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.