How Will the AHCA Affect the Credit of U.S. Health Insurers and Providers?

S&P Global Ratings
Written By: Deep Banerjee, Jennifer Soule and Shannan Murphy
S&P Global Ratings
Written By: Deep Banerjee, Jennifer Soule and Shannan Murphy

The plan to "repeal and replace" the Affordable Care Act (ACA) is back from the dead. After being pulled from the floor of the U.S. House of Representatives on March 24, an amended "repeal and replace" bill got enough votes to pass the House on May 4. The replacement bill (American Health Care Act; AHCA) could significantly change the health insurance markets, especially the Medicaid and individual markets. But it is far from a done deal. The replacement bill still has to pass the Senate and could eventually, if signed into law, look quite different from the version that passed the House today. S&P Global Ratings has identified the key provisions from the AHCA bill, which we discuss below.

Medicaid Market: Expect A Decline In Enrollees And More Costs To States

The proposed change in Medicaid funding for the expansion population will ultimately reduce the number of enrollees in the Medicaid programs over time. It allows new enrollees to join the expansion ranks until Dec. 31, 2019. But after 2019, it doesn't provide federal funding for any new eligible enrollees that aren't already enrolled, or for any current enrollee that has more than a month's break in eligibility. This effectively puts Medicaid expansion in "run-off" after 2019. Medicaid enrollees generally have a lot of churn due to change in income levels. Starting in 2020, even a low level of churn among the "run-off" expansion enrollees will result in a gradual decline in enrollment.

Additionally, the bill shifts Medicaid from an entitlement program to either block grants or per-capita funding, with growth in spending likely to lag health-care cost inflation. This will likely force some states either to reduce Medicaid eligibility levels or cut reimbursements to providers to offset the growing burden on state budgets.

Individual Market: Expect A Decline In Enrollees And Greater Differences Between The States

The AHCA changes the financing for premium support and subsidies in the individual market. It also proposes a wider premium rate band. In S&P Global Ratings' view, this combination will lead to a net decline in the number of insured in this market. We expect the drop in insured to be greater in the older age group, because our analysis indicates that the proposed age-based tax credit will not be adequate to offset the impact of higher premium rates.Some of the decline in the older population could be offset by gains in the younger population since premiums could decline for the young. But the net impact will be fewer enrollees in the individual market.

The replacement bill also provides states the option to receive waivers (as long as the state meets certain set conditions) for altering the currently standardized set of essential benefits. Although not all states are likely to use this waiver, we expect some to do so. As a result, there will be greater differences among states in terms of what is covered as part of a health insurance policy. Additionally, although the AHCA maintains guaranteed issue it allows states to receive a community rating waiver. The current ACA community rating system doesn't allow premiums to differ based on health status of an individual. Individuals with a preexisting condition cannot be charged a higher premium rate because of it. Under the AHCA, as a result of the waiver, individuals who don't maintain continuous coverage could be charged higher premiums based on their health status.

The proposed bill and its amendments do provide some funds to offset the potential higher premiums for individuals due to the community rating waiver, and additional funds to the states to reduce premiums, promote insurer participation, and stabilize the markets. The bill allows the federal government to provide the states with more than $120 billion, over time, for such purposes. Although these funds could have some positive effects, we don't expect this to be adequate to fully offset the lack of the ACA market subsidies and impact of the wider premium rates. The specific methods used by the individual states to use such funds may result in varying levels of effectiveness. For example, historical data show reinsurance programs (such as the one used in the ACA) have worked well, while high-risk pools have proven to be cost-prohibitive and generally unsuccessful. S&P Global Ratings will monitor the implementation of the AHCA closely--when and if this bill becomes law--to gauge its impact of these programs.

Credit Rating Impact On Health Insurers And Health-Care Providers

Insurers: No ratings impact at this time
We are not taking any rating action on our rated health insurers at this time based on the AHCA. We expect insurers to adapt to the new rules if and when the AHCA becomes law. However, there may be some hiccups initially because the proposed timeline for states and insurers to transition fully to the AHCA is a bit aggressive, in our opinion.

We maintain there will likely be a negative impact on insurers' revenues, because we expect a decline in enrollment in the individual and Medicaid markets (see "The U.S. Health Insurance Market Is Poised To Move To A Defined-Contribution From A Defined-Benefit System Of Federal Financing," published March 7, 2017, on RatingsDirect). At the same time, rated insurers in the individual market may see an improvement in profitability, because the AHCA will provide increased pricing flexibility with a wider range of premium rates and a likely reduction in essential benefits in some states. We expect minimal effect on the group (employer-sponsored) market, which remains the main source of revenue and earnings for most rated insurers. Although the current version of the AHCA opens the door to "limited benefit health plans" even in the group market, we expect most employers to retain their current levels of coverage, negating any meaningful impact to insurers' credit profiles.

Other than the AHCA, in the near term, we are closely following the uncertainty surrounding the Cost Sharing Reduction (CSR) subsidy, premium rate filings, and insurer participation in the individual market.

Health-care providers: Longer-term headwinds
We believe that passage of this legislation as proposed would add to credit stress in the not-for-profit and for-profit hospital sectors, which could lead to negative ratings actions over time and ultimately a negative outlook. This is especially true for safety-net providers that are vulnerable to Medicaid reductions. However, the funding reductions the bill currently proposes are spread out enough that an immediate negative outlook for 2017 is not currently warranted, in our opinion.

We believe passage of the legislation as proposed would compress operating revenues and margins for not-for-profit and for-profit hospitals. The overall payer mix for providers would weaken as the number of people without insurance would rise over time, as would the hospital sector's level of bad debt and charity care expenses. Under the proposed bill, changes to the Medicaid funding formula and exchange subsidies, as noted above, could also reduce eligibility as states make program adjustments, and lead to diluted operating margins for providers.

Currently, our outlook for the not-for-profit and for-profit health sectors remains stable, although we expect incremental pressure for hospital providers. We believe it's increasing likely we could lower our ratings and revise our outlooks on these entities as the AHCA is implemented and develops--there's some "negative rating bias" evident in the for-profit health services subsector due to pressured margins arising from from higher costs and slower utilization growth.

In addition to the proposed "repeal and replace" issue, we believe health-care providers are already under operating stress from a wide array of factors, including already weaker reimbursement growth, movement to value-based reimbursement, and rising labor costs.