S&P Maintains Negative Outlook on Health Insurance

(MoneyWatch)  Standard & Poor's is maintaining its negative outlook on the health insurance industry, according to an article by two S&P analysts in Business Week. The two main reasons are the continuing deterioration of the economy, which is increasing unemployment and the associated loss of insurance, and the uncertainties engendered by health-care reform efforts in Washington.

The analysts said they expected downgrades in credit ratings of insurance firms to exceed upgrades for the next six to 12 months. S&P has downgraded only one company so far this year, and the majority of insurers remained in the "A" category. However, the analysts note, "the share of insurers in the BBB category has decreased to 23% from 30% three years ago, while the share of speculative-grade issuers has increased to 23% from 13%."

On the positive side, they noted that one company--Health Care Services Corp.--is in one of the higher-rated categories (AA-). HCSC operates Blue Cross Blue Shield plans in Illinois, Texas, New Mexico, and Oklahoma.

No health insurers, however, currently have positive outlooks. Twenty-nine percent have negative outlooks, compared with 23 percent a year ago; 71 percent have a stable outlook, down from 74 percent a year ago. Among the companies with negative outlooks are CIGNA (BBB) and the two largest insurance companies, WellPoint (A-) and United (A-).

WellPoint expects its membership to drop by a million members because of increasing joblessness. United membership dropped by about 900,000 members at the end of March, compared with enrollment a year earlier. And while Cigna's membership in the first quarter was about the same as it was in the fourth quarter of 2008, and higher than in the year-earlier period, enrollment was significantly impacted by the acquisition of Great-West Healthcare. For all of 2009, Cigna expects membership to drop 3 to 4 percent, or by up to 467,000 members.

The S&P analysts also base their projections on weaker earnings for health insurers. They attribute this downturn to "unanticipated changes in business mix, an underestimation of medical cost trends, and the mispricing and/or costly benefit design of some insurers' Medicare Advantage and Part D prescription drug programs." To correct these problems, they predict that plans will try to implement "corrective pricing actions" in 2009--a euphemism for raising insurance rates.

However, the analysts note, well-positioned hospital systems will not only resist but will try to get more favorable pricing to make up for cutbacks in Medicare and Medicaid reimbursement. And plans that have a heavy reliance on government business will also feel the pinch, they say. This might raise questions about United's strategy of emphasizing its Medicaid business. But health reform could result in a big expansion of Medicaid if Sen. Kennedy has his way, so perhaps United's approach will prove to be prescient.

The biggest threat to the insurance industry, in the view of the S&P analysts, is that reform might take the shape of "a universal healthcare model with broad-based price and utilization controls." In that case, companies would have a hard time differentiating themselves and would have to focus on wellness and disease management programs to set themselves apart. In that case, the analysts suggest, plans might consolidate into large claims-processing companies for the government.

Of course, there's one other possibility--that the U.S. will move to a single payer system, or create a public plan that will eventually supplant the insurers. While the S&P analysts don't address that, it looks like the ultimate nightmare scenario for the insurance industry.