Insurers had strong year, but weaker earnings are ahead, says Moody's

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Health insurers ended 2022 with earnings up from the year prior, with EBITDA growing 12% in the fourth quarter, though a new report from Moody's Investors Service predicts that this growth will slow in 2023.

Lower COVID-19 costs and better results in the individual market contributed to insurers' strong performance, as did the continued suspension of Medicaid eligibility redeterminations, which will resume in April. Results for some issuers, however, were weakened by a steep financial market drop in 2022, which led to investment losses.

Moody's expects growth to slow from 2022, reflecting the resumption of redeterminations, but combined with continued growth in Medicare Advantage. There were a number of notable events that contributed to the outlook.

For one, the Centers for Medicare & Medicaid Services issued a final rule on risk-adjustment data validation (RADV) for Medicare Advantage. Under the rule, CMS could vastly increase the recovery of what it considers overpayments, and estimates it would collect $4.7 billion in payments from 2023 through 2032, up from $154 million under current rules. The industry is more concerned with potential unanticipated consequences from the rule change than with the current estimated recovery amount, said Moody's.

Also, there's a divided Congress, and because of that Moody's doesn't expect any major policy initiatives for healthcare over the next two years. And following the passage of the Inflation Reduction Act in 2022, several policy changes have already been enacted, including the extension until 2025 of the enhanced subsidies on the individual market and Medicare administrators' ability to negotiate drug prices starting in 2026.

Moody's also pointed out that the MA rate notice was lower than industry expectations. On February 1, CMS announced its 2024 advanced Medicare Advantage rate notice, which is the change in rates CMS pays to insurers. The result, which is preliminary and subject to change, was -1.4% excluding the impact of risk score trends and other adjustments. In contrast, the final adjusted rate notice was a 4.6% increase last year. The weak rate notice is on top of lower than expected star ratings for several issuers, said Moody's. As a result, revenue in the MA segment will likely be lower in 2024.

Vertical integration is alive and well, the company said. In its 2023 outlook for health insurers, Moody's said merger and acquisition activity might be muted in 2023 because of economic conditions, but vertical integration remains attractive for health insurers. As an example of the latter, CVS Health recently announced the acquisition of value-based care provider Oak Street for $10.6 billion.

WHAT'S THE IMPACT?

Moody's 2023 health insurance outlook is stable, despite a likely decline in membership for Medicaid with the onset of eligibility redeterminations, and possible slower growth in commercial if economic conditions remain soft. The company expects continued growth in Medicare Advantage and incrementally better performance in the individual market on additional changes in pricing and product design. Overall, Moody's expects mid-to-high single-digit growth in 2023 versus 12% in 2022.

THE LARGER TREND

In 2023, the company anticipates headwinds from the resumption of Medicaid eligibility redeterminations starting in April. As the companies that struggled in the marketplace business in 2021 achieved significant improvement in 2021, Moody's expects less incremental benefit in the marketplace business than last year, as well as less benefit from COVID-19 trends. 

As a result, it expects EBITDA growth in the mid-to-upper single digits. But with higher interest rates, better investment results could provide a bit of a lift, Moody's said.
 

Twitter: @JELagasse
Email the writer: Jeff.Lagasse@himssmedia.com