Fitch: ACA Ruling Effect on Insurance Uncertain

According to Fitch Ratings, the ultimate effect on the health insurance industry of December's federal court ruling that deemed the Affordable Care Act (ACA) unconstitutional is unclear, and what is expected to be a lengthy appeals process will follow. In the interim, Fitch Ratings anticipates that the elimination of the individual mandate effective January 1, 2019, will result in adverse selection in the individual market over time, potentially leading to further pricing volatility amid uncertainty around premium rate adequacy.

The appeals process for the December 14, 2018, surprise ruling could take years and may not exhaust itself until reaching the Supreme Court. However, states could choose to stop implementing and enforcing the law with the elimination of the tax penalty.

Due to the scope of the ACA, if the entire legislation is ultimately deemed unconstitutional and no new replacement legislation is passed, Fitch expects a period of disruption for the entire US healthcare system, including health insurers and insured individuals. For some health insurers, particularly those that have higher proportional exposure to exchange and Medicaid-driven enrollment, this disruption could lead to significant short-term earnings volatility. Over the longer term, the industry is expected to stabilize much as it did following previous disruption driven by implementation of the ACA.

According to Fitch, premium rate changes for exchange business in 2019 vary considerably, both by state and by plan. Since rates are locked in for the year, December's ruling is not expected to have a significant effect on the operating performance of health insurers until 2020 at the earliest. A key issue to be addressed in any potential replacement legislation is coverage for preexisting conditions. This protection is expected to be retained as it garners bipartisan support. More controversial elements include coverage exclusions and premiums based on age or gender, said the rating agency.

Fitch said the elimination of the individual mandate is one of a number of changes taking effect in 2019. However, the guaranteed issue requirement that remains in force under the ACA creates an antiselection challenge that may begin to generate earnings volatility for insurers operating in the individual market. Younger, healthier people may opt out of coverage as it becomes more expensive or choose to purchase slimmed-down plans, which would likely result in a higher proportion of unhealthy, more costly individuals in the pool.

Several companies exited various state health exchanges in the past couple of years, with some leaving the individual market entirely due to incurred losses. However, operating performance for most participants largely stabilized in 2018, according to Fitch.

Fitch said the ratings outlook for the health insurance industry is stable, with continued strong operating performance expected to be supported by strong employment, moderate medical cost trend, and continued growth in Medicare Advantage enrollment along with reasonable Medicare reimbursement rates.

Fitch projected that most major companies in the sector should see improving financial leverage over the next 24 months, with lower leverage driven by strong operating cash flows. The impact of increased financial leverage to fund mergers last year was incorporated into ratings during 2018. However, reduction of financial leverage is unlikely to result in ratings upgrades over the next 12 months.