Overall, a good climate in 2004

Will 2004 be a healthy year for health insurers? Despite a few caveats, the answer seems to be yes, according to a recent report by Standard & Poor’s, the big rating agency. Operating performance is expected to be strong this year, thanks to moderating medical costs and rate increases that are forecast to run between 10 percent and 12 percent, on average. That’s a bit lower than the 15 percent average seen in recent years.

Nonetheless, the sector is considered to have a more favorable credit outlook.

As of December, 30 health insurers merited a stable rating, compared with 35 the previous year. Yet the number of insurers with positive ratings climbed to eight, up from five. And the number of negative reviews was nearly flat.

“Pricing has, generally, exceeded the underlying cost trends,” says Joseph Marinucci,a S&P credit analyst. “On the whole, you can say things are improving.”

Certainly, earnings are rising and some insurers are using capital build-ups to make acquisitions. As a notable example of consolidation, he points to the planned merger between Anthem and Wellpoint Health Networks.

But there are a few variables to keep a close eye on. In particular, there’s the increasing likelihood of long-term pressures from health care providers, consumers, and employers — a triple whammy, of sorts, with an overt political twist.

As Marinucci points out, it remains possible that state regulators will continue to pressure not-for-profit insurers to keep a lid on rates. This will eventually reverberate up the food chain, forcing price competition on the for-profit insurers.

Meanwhile, class-action lawsuits will continue against several national insurers; the ratings agency doesn’t view these as such a big threat now that settlements were reached with some 700,000 doctors last year.

And while the prescription-drug program for Medicare won’t have an immediate impact on insurers, the development is a positive. “Initially,” says Marinucci, “it will stabilize the marketplace.”


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