Insurance Center

Healthcare Insurers Up Against Difficult Times in This Tough Economy

Sharply lower profits were earned by the major United States health insurers and managed care companies in 2008. Some earned nearly half of that for 2007, resulting from how poor stock market performance and lower interest rates cut away at these companies’ investment portfolios.

As a result of this economic downturn in bottom line results, some of those companies may be led to try and increase premiums. If they do though, some analysts are saying, they will likely meet stiff resistance from employers.

The shrinking commercial market, also hurt some insurers, while an underestimation of costs analysts are saying, stung many of those that dove headlong into the Medicare Advantage plan business.

According to industry analysts, health insurers will probably see group enrollment fall further, if U.S. unemployment continues to rise, and this is even after taking into consideration the effects of that which was made available under the American Recovery and Reinvestment Act of 2009, the 65% COBRA subsidy. COBRA premiums may be too expensive for the jobless, despite help from the federal government, especially those who are living solely on unemployment insurance benefits.

Meanwhile, analysts warn that the performance of insurers with a sizable portion of that market after the 2010 planned cuts in federal funding of Medicare Advantage programs, will be affected.

Profit margins of the top 10 health insurers dropped to about 5% and 6% in 2008, while in 2007 profit margins of health insurers had hovered in the 9% to 10% range, after several prior years of similar good performance/ Profit margins are expected to remain at the lower level into the near future.

Bradley Ellis, who is a director of the Chicago based Fitch Ratings, says that they are typically looking at the sector as being fairly strong. He points out that he and other analysts had been saying for several years that the 9% and 10% margins weren't sustainable.
He sees the poor investment results as being a major contributor to the lower margins.

Mr Ellis explains that interest rates are down since health insurers maintain a shorter duration in their investment portfolios than do life insurers, and they are replacing their higher-returning investments with lower-returning investments.

The Oakland, California -based Kaiser Foundation Health Plan Inc., saw its decline in the financial markets as being particularly problematic. They ended up by reporting a net loss of $794 million for 2008 to be compared with a net gain in 2007 of $2.2 billion.

Stephen Zaharuk, vp and senior credit officer at New York-based Moody's Investors Services Inc., says that although Kaiser was the only one of the leading 10 managed care companies to post a net loss for 2008, the rating agency has assigned a negative outlook for the entire sector.