News and Commentary

Insurers to Face Financial Challenges

Insurers have maintained strong earnings in recent years — much to the delight of stockholders — because of relatively stable expenses, improved case management, and new technology. However, a report by A.M. Best Company, a global credit rating organization, suggests that insurers will need to navigate a challenging financial landscape in 2008.

According to “Health Insurers’ Financial Results Will Be Tested as Markets Evolve,” health plans involved in Medicare and Medicaid may experience higher medical loss ratios overall because more, and more expensive, claims are being filed.

In addition, not-for-profit Blue Cross & Blue Shield companies may see a dip in revenue because these companies generate earnings through income, rather than underwriting gains.

The industry may also draw attention from Congress, particularly companies that are involved with Medicare Advantage programs, which have contributed to enrollment growth.

The report suggests that payment rates, particularly for private fee-for-service plans, may draw closer scrutiny from the federal government.

A.M. Best expects underwriting margins for provider-owned and -affiliated health plans to remain stable at 2.3 percent for the first nine months of 2007. This was the same rate as 2006’s full-year result. Historically, underwriting margins had been declining from as high as 2.8 percent in 2003 to 2.6 percent in 2004, before falling to 2.1 percent in 2005. Provider-owned and -affiliated health plans may also face pressure on medical loss ratios because of competition and higher costs as plans increase expenses related to sales, marketing, and commissions to defend their existing accounts and to expand their business.

And as in other election years, proposals by presidential candidates to reform health care, including Medicare expansion, granting states flexibility to develop coverage mandates, and tax credits to pay for expenses, will make 2008 an interesting year for the industry.


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