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U.S. Health Insurers' Credit Quality Will Likely Hold Up In 2021


Certain Issuer And Issue Ratings Placed Under Criteria Observation After Insurance Capital Model Criteria Update


An Operational Guide To S&P Global Ratings' Risk-Based Capital Adequacy Model For Insurers


Insurer Risk-Based Capital Adequacy Criteria Published


RFC Process Summary: RFC Process Summary: Insurer Risk-Based Capital Adequacy--Methodology And Assumptions

U.S. Health Insurers' Credit Quality Will Likely Hold Up In 2021

S&P Global Ratings' outlook on the U.S. health insurance industry remains stable for 2021. We believe U.S. health insurer ratings performed relatively well in 2020, as earnings benefited from lower-than-normal medical costs, bolstering capital cushions. However, given the COVID-19 pandemic is far from over (though an end is in sight), we believe the industry's resilience to its effects remains to be seen in 2021. Our stable outlook assumes the industry's credit quality will hold up well, but insurers will undoubtedly see more risks than in most years.

To start 2021, the industry will face a new presidential administration and a Democratic-controlled Congress. We believe one of the industry's highest-risk scenarios, some type of Medicare for All reform, is unlikely. Rather, we believe the Biden Administration will take a more moderate approach of building on the Affordable Care Act (ACA), which may bode well for the industry, depending on the details.

More broadly, the U.S. pandemic response and economic recovery will dictate health insurers' credit story in 2021. We expect weak employment, which will limit commercial group membership, will pressure the industry's revenue growth, but growth in managed Medicaid and Medicare Advantage will offset this. We believe the industry generally priced its products with conservatism in terms of medical costs for 2021, which should also support stable earnings.

However, insurers likely varied in their pricing assumptions regarding the pandemic's path, vaccines, and consumer behavior--potentially creating earnings divergence among insurers in 2021. S&P Global Economics' forecast assumes the vaccine will be widely available by midyear 2021, leading the economy back to its pre-pandemic GDP later in the year. This should spur increased medical costs (which insurers expect) as pent-up demand leads to higher-than-normal health care consumption.

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We expect sound balance sheets, which will insulate insurers from temporary earnings volatility, will continue to support the industry's credit quality. Most rated insurers hold regulatory capital well in excess of requirements and at least 'BBB' capital redundancies based on our model. Large health insurers also have diverse cash flows that enhance their financial flexibility. U.S. health insurers are predominantly rated investment grade ('BBB-' or higher), with a median financial strength rating in the 'A' category. Currently, 91% of our insurer ratings have stable outlooks, indicating a low likelihood of rating changes in 2021.

We also expect insurers' balance-sheet strengths and capital market conditions will support further mergers and acquisitions (M&A). Vertical integration will likely be a key trend for many deals as insurers attempt to differentiate their consumer-provider experiences and control larger portions of their medical costs. Financial leverage and integration and execution will remain key M&A risks.

As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Biden Will Likely Focus On Incremental Health Care Reform

We believe President-elect Joe Biden's top two legislative priorities will be the pandemic and its economic impact. Given these priorities and the Democrats' slim control of Congress, we believe some of the higher-risk policy proposals for the industry--the public option and, to a lesser degree, lowering the Medicare eligibility age--are unlikely. We believe these proposals may be nonstarters for conservative Democrats and independent-leaning Republicans.

Biden's more incremental proposals to build on the ACA are still in play, however. These proposals, which would likely enhance ACA exchange subsidies and eligibility, would be easier to push through in terms of government reach and budgetary cost. We believe these moves would grow and ultimately stabilize the size of the ACA exchange market. This would be a positive development for the industry, given increased interest in the market of late (see "ACA Exchanges Are Set To See More Competition And Lower Earnings" below).

Outside of legislative moves, Biden can still make changes through executive orders and regulation that would affect the industry. We believe he will likely reinstate and expand ACA marketing and outreach dollars and perhaps reduce the emphasis on short-term health plans. Via the Centers for Medicare & Medicaid Services (CMS), he could create incentives for or push states to pursue ACA-based Medicaid expansion, using regulatory authority to approve or deny state Medicaid waiver programs.

The Supreme Court Will Likely Uphold The ACA

After holding its oral hearing on California v. Texas in November 2020, the U.S. Supreme Court will likely opine on the constitutionality of the ACA in mid-2021. One possibility is that the court may rule the plaintiffs (led by Texas) do not have legal standing in their case. This would keep both the individual mandate and the rest of the ACA intact. However, if the Supreme Court rules that the plaintiffs do have legal standing, we could see the following scenarios play out:

  • The individual mandate is ruled constitutional, thereby keeping the entire ACA intact.
  • The individual mandate is ruled unconstitutional but severable from the rest of the ACA, thereby leaving the ACA mostly intact.
  • The individual mandate is ruled unconstitutional and inseverable from the rest of the ACA, thereby invalidating the entire ACA.

If the Supreme Court invalidates the entire ACA, which we view as unlikely, over 20 million Americans would be at risk of losing their health insurance in the middle of a pandemic. We believe the Biden Administration could neutralize a legal invalidation of the ACA (before or after the decision) through legislative means. The administration could also change the individual mandate penalty from zero to a nominal amount or revise the ACA to clarify that the individual mandate is severable from the rest of the law. Alternatively, Biden, along with some states, could craft a post-ACA transition plan or replacement.

Pricing Risks Could Create Earnings Volatility

We believe the industry's pricing flexibility provides it with some earnings protection, as insurers generally have the ability to reprice their products every 12 months and to do so prospectively, with various risks incorporated into premiums.

Pricing flexibility varies by market segment. In the commercial group market, for example, contracts renew at various points in the year, allowing insurers to reflect emerging cost trends in premiums. In the Medicare Advantage market, insurers set their premiums in June for the upcoming year--leaving them exposed to medical cost trends that develop later in the year. Meanwhile, in the managed Medicaid market, states and insurers can renegotiate rates if medical cost trends lead to deviations from the agreed-upon rates, but this process can result in delayed rate updates.

For 2021, insurers are incorporating a complex set of pricing assumptions into their premiums, given the uncertain path of the pandemic. However, we believe insurers are generally pricing conservatively relative to risks. They are assuming lower deferred care in 2021, as well as still-elevated COVID-19 testing and treatment costs. Many insurers are also assuming some members' medical conditions will worsen due to deferred care in 2020, resulting in higher costs in 2021.

Adding to these variables, insurers are making different assumptions about COVID-19 vaccines' availability, cost, effectiveness, and acceptance. Of course, vaccines are only one part of the pandemic response. Insurers are also considering whether COVID-19 treatment therapies could improve and whether providers will face capacity constraints as they did earlier in the pandemic. All of this will affect the pace and magnitude of medical cost trends in 2021 (see "COVID-19 Vaccine | Will Discovery Mean A Full Recovery?", Dec. 3, 2020).

On the flip side, it's possible medical costs may not increase as much as some insurers expect. We believe consumer behavior remains too difficult to predict. Recent surges in COVID-19 cases have resulted in less severe lockdowns than earlier in the pandemic. However, we believe consumers may still take their time in returning to person-to-person medical visits. Therefore, they may continue to defer certain types of care well into 2021 or even 2022 (see "The Health Care Credit Beat: A Rapid Bounce Back In Demand Accelerates The U.S. Industry’s Recovery Timelines," Sept. 16, 2020).

Commercial Membership Will Remain Under Pressure

S&P Global Economics' current forecast assumes the U.S. economy returns to its pre-COVID-19 GDP during the second half of 2021. However, the outlook on employment is bleaker, since we don't expect payroll employment to reach its pre-pandemic level (from February 2020) until 2023. Of course, if the Biden Administration is able to push through a fiscal stimulus package (on top of the $900 billion package that passed in December 2020), the employment rebound could be faster.

Thus far, the industry's commercial group membership losses have not been as severe as expected given employment numbers. We believe the $2 billion stimulus package in March 2020 likely stabilized employer payrolls and allowed for furloughs that maintained health coverage for employees. Further, the pandemic's job losses have been concentrated among low-wage jobs (in sectors such as leisure and hospitality), which may not have provided health coverage to begin with.

Still, we have a slightly negative outlook on the industry's commercial group growth prospects for 2021. Some furloughs may transition to permanent layoffs in the first half of the year. Moreover, state and local governments, which are commercial group accounts for insurers, are facing budgetary stress, which may result in layoffs. In line with our economic forecast, we believe a rebound in commercial group enrollment is possible, though likely not until the second half of the year.

Managed Medicaid Provides Near-Term Countercyclical Growth, With Risks

Medicaid enrollment has jumped as the pandemic has worsened the economic situations of many Americans. According to a Kaiser Family Foundation study, managed Medicaid enrollment (covered by private plans) grew by 11.3% from March 2020 to September 2020. Many insurers have said that states' temporary pause of Medicaid eligibility reverification--rather than the newly unemployed--has been the primary source of the enrollment gains. We expect Medicaid enrollment will grow further, peaking in 2021 before leveling off toward the end of the year.

For insurers in Medicaid, we believe growing revenue potential will be balanced by certain risks. Rising state budgetary pressures may cause some states to reset Medicaid rates at the low end of "actuarial soundness" requirements. Some states have also requested premium rate refunds (or similar financial transfers) from insurers, and additional states may pursue these actions. Many Medicaid contracts work both ways--with risk corridor provisions that cap profits but also limit downside risk relative to specified spending thresholds.

Beyond the pandemic, we still view managed Medicaid as a solid growth opportunity for the industry. Many insurers have noted a large number of Medicaid contracts up for bid in 2021-2022, including in several large states, such as California and Texas. We also expect states will increasingly move their high-cost, medically complex Medicaid members into managed care programs. This represents a large revenue opportunity, but with equivalent risks, given these members often require high-touch medical management and social support services.

Medicare Advantage Will Be A Reliable Growth Catalyst

The aging of the Baby Boomers and their apparent comfort with managed care products are creating robust demand for Medicare Advantage (MA) products, which insurers are rushing to meet. Bipartisan support of the MA program remains solid. Likewise, MA reimbursement (tied to Medicare fee-for-service costs) is stable. In October 2020, the CMS indicated in an Advance Notice that it may increase average MA rates by 2.82% in 2022, compared with 1.66% in 2021. This increase would benefit the industry, though the CMS won't finalize rates until April 2021.

We expect industrywide MA enrollment will grow by roughly 10% in 2021 (in line with the CMS' estimates), following growth of 9%-10% in 2020 and a compound annual growth rate of 8% during the past five years. MA penetration, or the percentage of Medicare beneficiaries enrolled in MA products, is set to increase to at least 50% within the next five to 10 years from 41% as of November 2020. This will create significant revenue growth for the industry, since MA members typically generate premiums per member that can be twice as large as those for commercial members.

MA growth presents some risks, however. Intensifying competition might have caused some insurers to price aggressively for 2021. Moreover, in the past, some insurers have struggled to bring on MA members during periods of rapid growth, which led to earnings stress. The pandemic has made it more difficult for insurers to get a sense of their MA members' health conditions, which not only affects their risk-adjusted revenue but could result in higher medical costs down the line. Beyond 2021, we see risks in general Medicare funding issues, MA Star program changes, and a potential redesign of Medicare Part D benefits.

ACA Exchanges Are Set To See More Competition And Lower Earnings

The ACA exchange market garners much attention despite its relatively modest size (roughly 11 million members). The market experienced a rocky start in 2014-2016, with operational issues and many market entrants taking on significant financial losses and exiting. Since then, the ACA exchanges have stabilized. As insurers adjusted their premiums and product designs, their profitability improved, and some insurers reported strong margins in this business in recent years.

According to the CMS, insurer participation in the ACA exchanges will increase in 2021 for the third year in row, while average benchmark plan premiums will decrease, also for the third year in a row. The Kaiser Family Foundation has said 30 insurers are entering the individual market in 20 states this year, and 61 insurers are expanding their service areas. We believe increased competition and lower rates (some due to rate regulation) will likely dampen revenue and earnings for some insurers. For example, Centene Corp., a major ACA exchange player, expects its peak ACA exchange enrollment (which fluctuates through the year) will be down in 2021 compared with 2020. It highlighted South Florida as one area of intense price competition.

From a risk-versus-return perspective, insurers have various reasons for being in the ACA exchange market. Many regional Blue Cross Blue Shield health plans view the ACA exchanges as an important part of their local market commitments. Other insurers, such as Centene Corp. and Molina Healthcare Inc., view the ACA exchange market as a natural extension of their Medicaid focus on low-income individuals. And tech-enabled startups, such as Oscar Insurance Corp., view the ACA exchanges as good entry points to the broader health insurance market.

M&A Will Keep A Steady Pace

We expect health insurers will continue to pursue small-to-midsize M&A at a steady pace in 2021, given supportive capital market conditions (low interest rates, healthy equity markets) and solid balance sheets. Each insurer has its own growth angle, but common M&A objectives appear to be 1) growing government-sponsored business (Medicare and Medicaid); 2) diversifying into nonregulated health care services (primary care, home health, pharmacy services, etc.); and 3) building technology and data analytics infrastructure.

Recently announced and completed deals highlight these trends. For example, UnitedHealth Group Inc.'s acquisition of Change Healthcare Inc. (announced in January 2021) will bolster its technology and data capabilities, as well as accelerate its innovation efforts in areas such as provider support tools, claims accuracy, and payment simplification. Meanwhile, Centene Corp.'s acquisition of Magellan Health Inc. (also announced in January) will improve its ability to manage behavioral health costs, while its acquisition of PANTHERx (completed in December 2020) will provide additional scale and strategic flexibility for its pharmacy benefit management business.

Financial leverage and integration and execution will remain key M&A risks. However, UnitedHealth's and Centene's recent deals both incorporated manageable risks (and therefore had no ratings impact), given each company's significant scale and reasonable plans to reduce leverage. We expect UnitedHealth will increase financial leverage to 44%-45% to finance its acquisition, but strong earnings will allow it to reduce leverage to about 40% in less than 12 months. For Centene, we also expect financial leverage to increase to 44%-45%, with a plan to reduce leverage over 12-18 months (which we view as conservative) via a combination of earnings, debt repayment, and other financing options.

Haven Healthcare's Farewell Shows That Health Care Is Complicated

In January 2021, Haven Healthcare, the much-hyped joint venture between Amazon, JPMorgan, and Berkshire Hathaway, announced that it would be dissolving. Despite not having a name, leader, or business plan when it launched in 2018, Haven immediately disrupted the health care market by causing health care stocks to plummet. However, following its launch, Haven struggled to build momentum and develop products and services. We believe its end highlights the difficulties of trying to enter and disrupt the health care industry.

We expect employers, retailers, and technology companies will continue to enter health care, though not necessarily via insurance. For example, Amazon continues to work on Amazon Care, a virtual and in-person health care clinic for its employees. Amazon also launched its online prescription pharmacy and drug discount program in 2020 (with some back-end help from Cigna Corp.'s health care services business Evernorth). Meanwhile, Walmart Inc. is testing health care clinics (not its first foray) and entering Medicare plan distribution.

Some startups are also making an impression in the health insurance industry, which is rare. At least two technology-focused health insurer startups are making public market debuts in 2021. Clover Health Investments Corp., an MA-focused company, went public via a special-purpose acquisition company on Jan. 8. Oscar Health Insurance Corp., which operates ACA exchange, MA, and small group coverage in 18 states, may go public via a traditional IPO later in 2021.

The Pandemic May Accelerate Certain Favorable Industry Trends

We believe the pandemic may help the industry in its push to implement more value-based payment arrangements with providers. Some insurers have noted increased interest in these arrangements. They surmise that some providers, particularly those with fee-for-service, volume-based businesses, may be reevaluating such arrangements after experiencing significant revenue declines during the pandemic.

The pandemic has also accelerated consumer and provider adoption of telehealth, remote monitoring devices and tools, and home-based health services. After peaking earlier in the pandemic, consumer usage of telehealth has leveled off, but at a significantly higher level than before the pandemic. Consumers' growing preference for home-based health matches up well with some insurers' (such as Humana Inc.'s) acquisitions and investments in this segment.

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Table 1

Ratings And Outlooks On Publicly Rated Insurers
As of Jan. 12, 2021
Company Financial strength rating/outlook Holding company long-term rating/outlook

Anthem Inc.

AA-/Stable A/Stable

Health Care Service Corp.

AA-/Stable NR

Kaiser Foundation Health Plan Inc.

AA-/Stable NR

UnitedHealth Group Inc.

AA-/Stable A+/Stable

Blue Cross & Blue Shield of Florida Inc.

A+/Stable NR

Blue Cross & Blue Shield of North Carolina

A+/Stable NR

BlueCross BlueShield of Tennessee Inc.

A+/Stable NR

Cigna Corp.

A/Stable A-/Stable

HealthPartners Inc.

A/Stable NR

Highmark Inc. (d/b/a Highmark BCBS & Highmark Blue Shield)

A/Stable NR

Horizon Healthcare Services Inc. (d/b/a Horizon Blue Cross Blue Shield of New Jersey)

A/Stable NR

Humana Inc.

A/Stable BBB+/Stable

Louisiana Health Service & Indemnity Co. (d/b/a Blue Cross and Blue Shield of Louisiana)

A/Stable NR

Aetna Inc.

A-/Stable BBB/Stable

Blue Cross & Blue Shield of Minnesota

A-/Stable NR

Centene Corp.

A-/Stable BBB-/Stable

Noridian Mutual Insurance Co.

A-/Stable NR

Excellus Health Plan Inc.

BBB/Stable NR

Triple-S Salud Inc.

BBB/Stable NR

HealthNow New York Inc.


Blue Cross & Blue Shield of Rhode Island Inc.

BBB-/Stable NR

Molina Healthcare Inc.

NR BB-/Positive

ICH Intermediate Holdings II L.P.

NR B+/Neg
NR--Not rated. Ratings as of Jan. 12, 2021. Source: S&P Global Ratings.

Table 2

Rating Actions And Outlook Revisions For 2020
Company To From Date Rationale

WellCare Health Plans Inc.

BBB-/Stable/-- BB/Watch Pos/-- Jan-20 Upgrade - Acquired by Centene Corp.

HealthPartners Inc.

A/Stable/-- A+/Stable/-- Apr-20 Downgrade - Operating performance

HealthNow New York Inc.

BBB/Stable/-- BBB/Watch Pos/-- Jun-20 CW-Pos - Announced affiliation with Highmark Inc.

Excellus Health Plan Inc.

BBB/Stable/-- BBB+/Negative/-- Sep-20 Downgrade - Capital deterioration

ICH Intermediate Holdings II L.P.

B+/Negative/-- B+ /Stable/-- Dec-20 Negative outlook - leverage

Cigna Corp.

A/Stable/-- A/Negative/-- Dec-20 Stable outlook - Met deleveraging target
Source: S&P Global Ratings.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:James Sung, New York + 1 (212) 438 2115;
Ieva Rumsiene, Centennial + 303-721-4734;
Secondary Contacts:Kevin T Ahern, New York + 1 (212) 438 7160;
Francesca Mannarino, New York + 1 (212) 438 5045;
Joseph N Marinucci, New York + 1 (212) 438 2012;
CHRISTOPHER J FLYNN, New York + 1 (212) 438 0224;
Additional Contacts:Stephanie Hsu, New York + 1 (212) 438 1884;
Zhi Fan Luo, New York + 1 (212) 438 3204;
Divya Shastry, Mumbai;

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