Health insurers' earnings up 3.7%, outlook stable, says Moody's
Enrollment growth was strong in Medicaid and Medicare Advantage, but was partly offset by increased medical costs.
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After a strong first quarter, health insurers can expect earnings growth and a stable credit outlook, Moody's Investors Service has found.
Average earnings growth before interest, taxes, depreciation and amortization growth in the first quarter was 3.7% among seven publicly traded health insurers, said Moody's new report.
But that includes investment income and realized gains or losses, which have been weakened by market conditions. Excluding those factors, the earnings growth among those insurers was actually up 10.3%, Moody's said.
Enrollment growth was strong in Medicaid and Medicare Advantage, but was partly offset by increased medical costs, reflecting the COVID-19 Omicron variant and the increasing use of care unrelated to COVID-19. The forecast is for low double-digit EBITDA growth based on lower COVID-19 costs and better performance in the individual market, which will contribute to a stable credit profile and improved leverage, the report found.
WHAT'S THE IMPACT
Among the other findings was that Medicaid enrollment will decline once the public health emergency expires.
Since the pandemic began and a PHE was declared, states have suspended Medicaid eligibility reviews. As a result, Medicaid enrollment has increased 23%, or 16.3 million, to 87 million since the pandemic, boosting earnings for Medicaid insurers. It's now estimated that about 10% of current enrollees will no longer qualify when the PHE expires, possibly in July, and eligibility reviews resume.
At-home COVID-19 testing costs were lower than expected, the report found. In 2022, health insurers were required to cover at-home testing costs. There were concerns that this could increase medical costs, but that has not been the case, based on Moody's discussions with health insurers. The cost of the at-home test is significantly lower than in-office testing, and to date, the frequency has been lower than the companies expected. It has not been a driver of medical costs.
Meanwhile, pandemic-related individual market subsidy increases are set to expire at year's end. These increased subsidies helped push individual market enrollment to a record 14.5 million for 2022, a 2.5 million person increase from the previous year. Without new legislation to extend these subsidies, Moody's said it expects much of the enrollment gains to reverse.
The report also found that greater scrutiny of mergers and acquisitions by the Department of Justice could slow consolidation. The Biden administration has called for increased scrutiny of corporate consolidation in several industries, including health insurance. For example, in February, the Department of Justice sued to block UnitedHealth's acquisition of Change Healthcare. Consolidation has been a key strategy to expand capabilities and better control costs, but it can also increase leverage, which can be credit negative, according to Moody's.
THE LARGER TREND
In December, Moody's affirmed a stable outlook for the health insurance sector. Earnings growth in 2021 was muted for the companies Moody's surveyed, reflecting elevated COVID-19 costs exacerbated by the Delta and Omicron variants.
Despite the weaker growth, Moody's said, health insurers' credit strength was largely unaffected. In fact, the growing diversification of the industry with the increasing investment in unregulated health services has boosted companies' credit strength, despite incrementally higher leverage.
For 2022, Moody's continues to forecast earnings growth to pick up based on lower COVID-19 costs, better performance in the individual market and better commercial trends, barring a sharp economic reversal and as long as growth continues in Medicare Advantage.
Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com
