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Health Insurance Sector View 2023


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Health Insurance Sector View 2023

S&P Global Ratings has a stable view on the U.S. health insurance industry. Credit quality for the industry will remain strong based on favorable long-term themes, including public policy that supports coverage stability, strong growth prospects in government-sponsored programs, and the ability to re-price products annually for developing cost trends. Sound balance sheets, based on risk-based capital and credit protection measures, will continue to be industry strengths.

We believe the industry's growing scale and diversification into non-insurance health care services will also give it new revenue and earnings sources, while helping to advance value-based care so that payors can better manage medical and pharmacy costs. These trends will solidify the industry's long-term barriers to entry and sustain its earnings growth.

We expect the industry will show financial resilience and rating stability as the pandemic possibly transitions to an endemic. In 2023, the industry will contend with the second recession since the pandemic began, and higher medical cost inflation based on normalized utilization and provider cost pressures. While we expect limited legislative risk in 2023-2024, we will keep an eye on regulatory activity, given the growing importance of government-sponsored business to the industry.

Rating and Outlook Overview: Average Financial Strength Rating In the 'A' Category

We have public ratings on 21 insurance groups, which include seven for-profit publicly-traded companies, 12 privately-owned Blue Cross & Blue Shield (BCBS) health plans (a mix of for-profit and not-for-profit companies), and two integrated health care delivery systems (Kaiser Permanente and HealthPartners).

We saw limited rating activity in 2022. Positive rating actions included two upgrades: (1) Excellus Health Plan Inc., based on capital improvement (2) Triple-S Salud Inc., based on its acquisition by GuideWell (parent of BCBS Florida). Negative rating actions included our outlook revision on Horizon Healthcare Services Inc. to negative from stable, based on its form change to a mutual holding company and our expectation of temporarily weakened capital. We also revised our outlook on Aetna Inc. (a subsidiary of CVS Health Corp.) to stable from positive, based on our updated views of CVS Health's financial policy and capital deployment plans.

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Shallow Recession in 2023 Will Be A Modest Headwind For The Industry

S&P Global economists' forecast assumes the U.S. economy will be in a shallow six-month recession in the first half of 2023. We expect the recession's shallowness and short duration will limit its financial impact. Higher unemployment and job losses will dampen industry growth in the commercial group segment. However, industry growth will benefit from health coverage programs, including the Affordable Care Act (ACA) marketplaces and Medicaid expansion, which were not established in the 2007-2009 recession. These programs, as well as non-cyclical Medicare Advantage growth, will help the industry offset modest commercial membership losses.

Table 1

S&P Global Ratings' U.S. Economic Forecast Overview
2020 2021 2022f 2023f 2024f 2025f 2026f
Key indicator
Real GDP (year % change) -2.8 5.9 1.8 -0.1 1.4 1.8 1.9
Core CPI (year % change) 1.7 3.6 6.3 4.7 2.8 2.4 2.2
Payroll employment (mil.) 142.1 146.1 152 152 151.5 152.6 153.2
Unemployment rate (%) 8.1 5.4 3.7 4.9 5.3 4.8 4.6
Federal funds rate (%) 0.1 0.1 2.2 5 4.4 3.2 2.6
10-year Treasury (%) 0.9 1.4 3 3.9 3.4 3.3 3.3
S&P 500 Index 3,756 4,766 3,777 3,820 4,037 4,124 4,284
Note: All percentages are annual averages, unless otherwise noted. Core CPI is consumer price index excluding energy and food components. f--forecast. Sources: BEA, BLS, The Federal Reserve, S&P Global Market Intelligence, and S&P Global Economics' forecasts.

Job losses and lower discretionary income will affect medical spending by consumers. If the recession is worse than expected, the industry could see a temporary medical costs increase if consumers accelerate use of their health benefits in anticipation of job and health coverage losses (or transitioning to coverage with less generous benefits). Outside of this scenario, we expect a recession would generally curtail medical spending by consumers, particularly for non-emergent care like elective procedures, which would be slightly favorable for industry loss ratios.

Inflationary pressures will affect the industry's medical costs because hospitals and providers are requesting higher reimbursement as they contend with recovering patient volumes, labor force and supply chain issues, and payor mix shifts (with a growing portion of Medicare and Medicaid business). We believe insurers have some natural hedges against this risk. Provider contracts are typically several years in duration and renewal dates are staggered (with only a portion up for renewal each year). We believe insurers with strong commercial market shares will be well-positioned in their contract negotiations. Insurers can also incorporate at least some portion of higher costs into premium rates in 2023-2024.

Higher interest rates will have both favorable and unfavorable financial effects on the industry. Many health insurers have relatively short-to-medium duration fixed-income focused investment portfolios. Insurers will benefit from higher reinvestment interest rates as their investments mature. Conversely, higher rates will continue to result in unrealized investment losses, which will lower generally accepted accounting principles (GAAP) investment income and equity. For insurers with sizable equity investment portfolios (predominantly BCBS health plans), equity market swings will cause earnings and capital volatility.

Higher interest rates will also affect health insurers that need to raise debt in 2023 to refinance existing debt or fund acquisitions, a key part of many insurers' growth strategies. In 2022, UnitedHealth Group Inc., Elevance Health Inc., and Humana Inc. issued a total of $20 billion of senior notes, with each issuer going to the market twice that year. In 2023, UnitedHealth, Elevance, Cigna Corp. and Humana Inc. will have $8 billion of senior notes maturing (including $1 billion of Elevance notes that matured in January 2023). Centene Corp. and Molina Healthcare Inc. do not have any senior notes maturing until 2027 and 2028, respectively.

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Limited Legislative Risk In 2023-2024

We expect limited legislative risk for the industry in 2023-2024, based on expected gridlock in a split Congress, with Democrats and Republicans holding slim majorities in the Senate and House, respectively. The federal government passed several pieces of legislation during the pandemic to stabilize health coverage for Americans, though some aspirational policy goals, including further Medicaid expansion and enhanced Medicare benefits, did not reach final legislation. We expect some states (like South Dakota) could pursue Medicaid expansion in 2023-2024, following ballot results in 2022, though large Medicaid expansion holdout states, like Texas and Florida, are unlikely to do so. We expect Medicare and Medicaid program changes could be discussed if legislators engage in debt ceiling negotiations. The impact of these changes would depend on the details of the reforms.

The Inflation Reduction Act (IRA) of 2022 included health care provisions that will affect the industry in the next several years. The IRA extended the American Rescue Plan Act of 2021's enhanced consumer subsidies for ACA products (plus the elimination of the 400% federal poverty level income cap for subsidy eligibility) by three years for 2023-2025. We view this favorably for the industry because it expands the addressable market for subsidized ACA products. Conversely, the limited timeframe of the subsidy extension means that its renewal will be a future political issue. Separately, the IRA includes changes to the Medicare Part D program, which will increase the portion of drug costs that health plans will cover in standard Part D products, and limit their ability to raise premiums to less than 6% through 2029. Separately, the IRA also delays rebate reforms affecting the pharmacy benefit management (PBM) business to 2026.

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COVID-19 Cost Pressures Will Lessen In 2023

We expect COVID-19 will become less of an industry story in 2023 as the pandemic possibly transitions to an endemic phase. In 2022, the Omicron variant (which spread in late 2021) led to a spike in cases and hospitalizations early in the year, though this decelerated rapidly. Following the initial Omicron spike, we saw no major COVID-19 spikes during the remainder the year. We expect industry earnings in 2023 will benefit from lower direct COVID-19 costs based on lower testing and treatment costs, slightly offset by higher vaccine costs as the federal government transitions vaccine purchases to private health insurers. If COVID-19 surges occur, we expect insurers will benefit less from deferred care during the surges in 2020-2022 because of improved provider capacity and COVID-19 treatment measures.

Assuming no COVID-19 surges, we expect generally more predictable medical cost patterns in the year (closer to pre-pandemic seasonal norms). The respiratory trifecta of the flu, COVID-19, and RSV will result in elevated medical costs during the typical flu season in the winter months. However, these costs may be more frontloaded in the fourth quarter rather than the first quarter of the 2022-2023 season.

Chart 6


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Recessionary Pressures Will Dampen Commercial Segment Growth Prospects

The commercial group segment is the industry's largest based on total fully-insured and self-funded membership of about 156 million. This segment will face modest growth headwinds in 2023 because of weakening employment conditions and potential earnings pressure from higher medical cost inflation. These near-term expectations are consistent with our long-term view that the commercial group segment is a highly mature segment with modest growth prospects. At the same time, the segment will continue to provide solid long-term pretax margins in the mid-to-high single digits for health insurers operating the business efficiently.

We believe health insurers priced their commercial products to incorporate higher medical cost inflation (at or above the pre-pandemic level of roughly 4%-6%) in 2023. However, health insurers likely varied in their pricing strategies this year, based on geography, market segment, and specific clients. Health insurers noted that commercial utilization was at or above pre-pandemic baselines in 2022. We expect normalized utilization, higher health acuity (from missed/deferred care and long COVID), provider cost pressure, and specialty drug costs will contribute to higher medical cost inflation in 2023. This will be slightly offset by recessionary pressures that limit non-emergent utilization, provider capacity constraints, and favorable shifts in consumer usage towards lower cost sites of care (outpatient facilities, urgent care, and telehealth).

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Medicaid Redeterminations Will Lead To Gradual Membership Losses in 2023-2024

The Medicaid program is a federal and state funded, state-operated health insurance program covering low-income individuals and families and those with certain disabilities. 72% of all Medicaid beneficiaries (57 million out of 79 million as of July 2020) are covered by comprehensive managed care programs according to MACPAC, an independent agency that supports Congress.

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We view Medicaid as a key long-term growth area for the industry based on our expectation that states will increasingly contract with private health insurers to manage their high cost, high acuity Medicaid populations (accounting for roughly 50% of Medicaid expenditures). We also expect incremental growth from states that decide to pursue Medicaid expansion in the next several years (11 holdout states remain).

During the pandemic, the industry benefited from strong Medicaid enrollment gains (19.8 million from February 2020 to September 2022) because of the temporary pause on Medicaid redeterminations. Many insurers reported favorable financial results from these gains and subdued medical utilization (offset by COVID-19 risk corridor clawbacks in some states). We expect these trends will partly reverse in 2023-2024 because of the return of Medicaid redeterminations (April 1, 2023) and higher medical utilization. The Kaiser Family Foundation estimates between 5 million to 14 million will lose coverage owing to redeterminations in 2023-2024. Despite these losses, Medicaid membership could still end up higher (post-redeterminations) than the pre-pandemic level (71.1 million in February 2020).

We think states are financially motivated and have regulatory guidelines to complete their redeterminations gradually (within 12 months), preventing a revenue cliff for health insurers. The Omnibus spending bill for 2023 provides for a gradual phase out (instead of a sudden end) of enhanced Medicaid funds for states. Additionally, federal guidelines dictate how many members can be disenrolled in any given month (1/9 of total members). We believe health insurers will be able to recapture some portion of disenrolled Medicaid members in their ACA marketplace and commercial group businesses. A deep and prolonged recession (which typically increases Medicaid membership) would also mitigate membership losses from redeterminations.

Medicaid rates and redeterminations will be key earnings factors in 2023-2024. We believe the Medicaid rate environment is stable. State budgets are generally in good shape thanks to strong reserves (even with federal stimulus rolling off). Moreover, federal regulations dictate that Medicaid rates are actuarially sound, which provides some baseline for rate adequacy. Rate adequacy is important because we expect medical utilization in Medicaid will likely increase in 2023-2024, after generally lagging pre-pandemic levels in 2020-2022. Health insurers will also need to contend with the uncertain earnings impact of losing members through redeterminations. Health insurers could face earnings pressure if they predominantly lose members that utilize zero-to-low medical care, and end up with a membership base with higher average medical costs. Health insurers will likely seek higher rates from states if needed, though states will vary in their timeliness and flexibility in adjusting rates.

We expect an active Medicaid contract request-for-proposal (RFP) and award season. Georgia, Florida, and Idaho will likely release RFPs in 2023. New Mexico, Indiana (MLTSS program), Texas (STAR+PLUS program), and Oklahoma will likely announce contract awards. We believe Medicaid contract incumbents have some advantages in retaining contracts. However, contract awards will continue to be hotly contested, which can result in delayed awards and contract implementations, as well as modifications (as was the case with California's Medi-Cal RFP in 2022).

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Strong Expected Growth In Medicare Advantage With RADV Headline Risk

The Medicare Advantage (MA) program offers private health plans for Medicare eligible beneficiaries, which includes people over 65, certain younger people with disabilities, and those with end-stage renal disease. As of December 2022, the MA program had 29.6 million members, representing about 47% of total Medicare beneficiaries.

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MA will remain the industry's most robust and reliable growth driver in 2023-2024. We expect strong industry-level MA membership growth of 7%-8% in 2023 (compared with about 8% in 2022) based on the Centers for Medicare & Medicaid Services' (CMS) projections. MA penetration will increase toward the industry milestone of 50% in 2023. Industry MA revenue will benefit from solid MA rate growth for 2023 (5% on average before risk score trend) and generally higher MA Star ratings for 2022 (affecting 2023 revenue) based on company improvements and COVID-19 relief measures.

CMS will release its preliminary MA rates for 2024 in February 2023. We expect MA rates will be positive, though more modest than rates in recent years. CMS already released its MA Star ratings for 2023 (affecting 2024 revenue). Many companies (like CVS Health and Centene Corp.) had lower MA Star ratings because of higher weights of certain MA Star measures, and the phase out of COVID-19 relief measures. These results will dampen many companies' MA revenue and profitability in 2024.

We expect headline and earnings risk related to CMS' release of its final risk adjustment data validation (RADV) rule on Feb. 1, 2023. CMS conducts RADV audits annually on select MA health plan contracts to recoup overpayments from inaccurate or incomplete data submitted by MA health plans to support risk adjustment revenue. The industry is focused on whether CMS will follow through on its 2018 proposal to exclude a fee-for-service adjustor in its methodology, which would increase potential recoupments from MA health plans, and whether CMS will retroactively apply this methodology to prior years' audits (dating back to 2011). Certain MA health plans could have significant overpayment requests from CMS based on these RADV changes. Moreover, the changes could dampen future MA profitability. We expect the industry will likely push back on an unfavorable outcome from the final RADV rule, which could delay its implementation or affect its outcome.

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Record Growth In The ACA Marketplace Resulting From Legislative And Regulatory Changes

The ACA marketplace is the smallest of the major health insurance segments based on membership (16.3 million enrolled as of January 2023). Owing to improved market stability, it is becoming an important source of the industry's growth, diversification, and earnings. The ACA marketplace offers subsidized individual and family-based health coverage for consumers that do not qualify for other forms of commercial group, Medicare and Medicaid coverage.

The ACA marketplace has matured since its rough start in 2014-2016 when insurers mispriced products and had significant losses. In 2021-2022, the federal government took legislative, regulatory, and financial steps to bolster the ACA marketplace. It enhanced and expanded consumer subsidies for ACA products for 2021-2025, fixed the "family glitch" for 2023, and invested in outreach and enrollment assistance. We think these measures will lead to record enrollment in the ACA marketplace in 2023.

According to CMS, nearly 16.3 million Americans signed up for ACA product as of Jan. 15, 2023, representing growth of 13% from the same time last year. We expect the industry will benefit from higher demand for ACA products in 2023-2024 based on a larger number of Americans eligible for subsidies, and Medicaid redeterminations, causing some members to seek ACA coverage. We expect firmer industry pricing in 2023-2024 based on market exits by newer companies (like Bright Health, Friday, and Oscar Health) and market expansions by established, national companies (like UnitedHealth and CVS Health). Industry earnings in 2023 should benefit from premium rate increases (anticipating higher utilization) and less earnings volatility from COVID-19 surges (concentrated in 2021) and adverse selection (related to the extended open enrollment period in 2021).

Chart 19


M&A Focused On Vertical Integration Plays

Mergers and acquisitions (M&A) are a key part of all publicly-traded health insurers' growth strategies. After a couple of health insurer megadeals failed to get regulatory approval in 2015-2017, the industry pivoted towards smaller tuck-in health insurance deals and increasingly, non-insurance health care services deals. In many cases, the industry's increasing focus on health care services are vertical integration plays. The largest health insurers are becoming diversified health care companies that own various parts of the health care ecosystem, including care delivery, pharmacy services, and home health. This strategy provides companies with a growing source of non-regulated earnings (versus regulated insurance earnings) and more control over their medical and pharmacy costs, which can be an important competitive advantage.

In 2022, there was a steady flow of acquisitions and divestitures. The largest completed deal of the year was UnitedHealth's October 2022 close of its long pending acquisition of Change Healthcare, a healthcare technology company. This deal was nearly derailed as it encountered significant regulatory scrutiny. UnitedHealth also announced its acquisition of home health provider LHC Group in May 2022, expected to close in 2023. The next largest completed deal was Centene's January 2022 acquisition of Magellan Healthcare, though it quickly pivoted towards divesting Magellan's pharmacy and specialty health businesses during 2022 as part of a broader divestiture strategy. Cigna Corp., Humana Inc., and CVS Health also announced or completed divestitures of non-core businesses in 2022.

CVS Health returned to the M&A market in 2022, following a period of focusing on debt reduction, with its announced acquisition of Signify Health, a home health and value-based physician enablement company, which it expects to complete in 2023. CVS Health made it clear that it intends to acquire a sizable primary care business in the near future. Competition among health insurers, retailers, and financial sponsors for primary care and care delivery assets is rising. In 2022, UnitedHealth and Humana Inc. continued to acquire and build care delivery assets. Amazon announced its acquisition of One Medical; and VillageMD (majority owned by Walgreens), and Cigna Corp. announced their joint acquisition of Summit Health, a multispecialty medical practice and urgent care business.

We saw more health insurance consolidation in 2022. Elevance Health acquired Integra Managed Care, a managed long-term care plan in New York and Paramount Advantage's Medicaid contract in Ohio. Elevance followed this up with its announcement on Jan. 23, 2023 that it will be acquiring BCBS Louisiana. This acquisition would be its first of another BCBS health plan since the early 2000s. Separately, Molina Healthcare has been among the most active in acquiring other insurers. In 2022, Molina completed its acquisition of AgeWell New York and announced its acquisition MyChoice Wisconsion, expected to close in 2023.

Within the privately owned Blue Cross & Blue Shield (BCBS) space, GuideWell (parent of BCBS Florida) completed its acquisition of Puerto Rico-based Triple-S Management Corp. Health Care Service Corp. and BCBS North Carolina both completed acquisitions of third-party administrators. While not a health insurance deal, Prime Therapeutics, a PBM owned by a group of BCBS health plans, completed its acquisition of Magellan Rx Management (from Centene Corp).

In 2023, we expect another steady year of acquisitions by publicly-traded health insurers and select acquisitions by privately-owned insurers.

While each insurer has its own targets, common M&A themes will include:

  • Growing in Medicare and Medicaid,
  • Diversifying into health care services, and
  • Building technology and data analytics infrastructure.

In the absence of acquisitions, publicly-traded health insurers will continue to utilize share repurchases to meet their earnings growth targets, while privately-owned health insurers will build capital for long-term financial flexibility.

Chart 20


Elevated Financial Leverage Balanced By Solid Credit Protection Metrics

Most publicly traded health insurers have a reported debt-to-capital ratio target of 35%-40%, and temporarily go above 40% for certain acquisitions, with the intention of reducing leverage to 35%-40% within 12-24 months. These companies generate significant free cash flows, with a sizable amount of deployable capital that can be utilized for debt repayment if needed. Debt reduction plans are typically based on a combination of short-term debt repayment and earnings growth. For large transactions, some companies will pull back on share repurchases. Most publicly traded health insurers have solid debt repayment and coverage metrics.

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What Could Weaken The Industry Outlook?

The following are potential downside scenarios.

Lower run-rate profitability

The health insurance industry generates single-digit pretax margins off large revenue bases primarily consisting of premiums. Industry margins could deteriorate because of sustained price competition, higher than expected medical costs, unsuccessful operating cost reductions, integration issues, and/or policy and regulatory actions.

Debt-funded acquisitions

Increased competition for acquisition assets may cause more companies to overpay for acquisitions or enter businesses where they lack expertise. Overextended financial commitments and integration failures would likely lead to downgrades on a case-by-case basis and affect the industry outlook if prevalent.

Weakened capitalization

Rated health insurers generally maintain a good level of capital cushion in terms of their regulatory risk-based capital requirements, as well as those based on our capital model. Weakened capitalization because of lower profitability, lower quality of capital (reflecting higher debt and intangibles), and financial policy changes could lead to downgrades.

Public policy and regulatory changes

The industry has weathered transformative health care legislation like the ACA (2010) relatively well. However, policy proposals calling for greater government involvement in the industry, including variations of "Medicare-for-All" or the "public option", will likely resurface in future elections. We also expect the industry will contend with greater regulatory and compliance risks as it pursues growth in government-sponsored business.

Table 2

Ratings And Outlooks On Publicly Rated Insurers
As of Jan. 26, 2023
Company Financial strength rating/outlook Holding company long-term rating/outlook

Elevance Health Inc.

AA-/Stable A/Stable

Health Care Service Corp. d/b/a Blue Cross Blue Shield of Illinois, New Mexico, Oklahoma, Texas and Montana

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/Negative 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

Triple-S Salud Inc.

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

Blue Cross & Blue Shield of Rhode Island Inc.

BBB/Stable NR

Molina Healthcare Inc.

NR BB-/Positive
NR--Not rated. Ratings as of Jan. 25, 2022. Source: S&P Global Ratings.

Table 3

Rating Actions And Outlook Revisions For 2021-2022
Company To From Date Rationale

Blue Cross & Blue Shield of Rhode Island Inc.

BBB/Stable/-- BBB-/Stable/-- Feb-21 Upgrade - Improved Capital

HealthNow New York Inc.

A/Stable/-- BBB/Watch Pos/-- Mar-21 Upgrade - Completed affiliation with Highmark Inc.

Aetna Inc.

A-/Positive-/-- A-/Stable/-- June-21 Positive outlook - Tied to parent CVS Health deleveraging

Triple-S Salud Inc.

BBB/CW Pos/-- BBB/Stable/-- Aug-21 CW-Pos - Announced acquisition by GuideWell (BCBS FL)

Triple-S Salud Inc.

A/Stable/-- BBB/CW Pos/-- Feb-22 Upgrade - Acquired by GuideWell (BCBS FL)

Delta Dental of New Jersey Inc.

NR A/Negative/-- Feb-22 Withdrawal

Excellus Health Plan Inc.

BBB+/Stable/-- BBB/Stable/-- Sept-22 Upgrade - Improved Capital

Aetna Inc.

A-/Stable/-- A-/Positive-/-- Dec-22 Stable outlook - Tied to parent CVS Health
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;
Francesca Mannarino, New York + 1 (212) 438 5045;
Secondary Contacts:Joseph N Marinucci, Princeton + 1 (212) 438 2012;
Shawn Bai, Toronto +1 4165072521;
Zhi Fan Luo, New York + 1 (212) 438 3204;
Ansh R Mishra, Pune;

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