Moody's sees more insurer exchange competition in 2015News added by Benefits Pro on June 24, 2014

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By Dan Cook

Insurance industry filings and public statements suggest more insurers will offer health coverage through state public exchanges next year, and many insurers who sold via exchanges this year will increase the number of states where they offer exchange-based products, according to a report from Moody's Investors Service.

But despite the prospect of increased competition for exchange business that these trends represent, some large insurers have announced they will raise their premium rates – with possible double-digit hikes.

Overall, Moody's likes what it is seeing from a credit rating standpoint, and believes the industry is acting responsibly with the measures it is taking.

“Because the products on the exchanges are standardized, more competition would result in less membership growth potential for each insurer,” Moody's said. “However, since the policy-buying population has an unknown medical status and potentially unfavorable risk characteristics, less membership, and therefore less risk, is credit positive.”

Moody's says that the first year offered insurers important lessons on pricing:
    1. Large insurers in general either lost money or broke even with exchange business, signaling the need to raise premium rates; and

    2. Many small insurers set their rates too high, and so intend to adjust them downwardly in 2015.
“As a result of the premium increases by the larger insurers and premium decreases by the smaller carriers, premiums are converging and 2015 is likely to have less variance among premium rates than apparent on the exchanges this year,” Moody's said.

Moody's based its initial rate hike forecast on public filings by health insurers in 10 states. It said more data will become available as insurers operating in other states comply with reporting requirements.

“The rate increases reflect an increasing medical cost trend that we expect will grow at an annual rate of 5 percent to 6 percent, an increase in the Affordable Care Act industry fee and continued anti-selection owing to regulatory changes that allow individuals to maintain non-compliant plans for another year,” Moody's said.

Raising premiums will inevitably cause most insurers to lose customers, but that's OK, Moody's said.

“The premium increases show that insurers have chosen to protect earnings margins rather than push membership growth,” it reported, noting that from a credit rating standpoint, that's a good thing.

“However, rates are not yet final,” Moody's cautioned. “State regulators must review and approve the premium rate changes that the insurers submitted. For states without strong regulatory insurance oversight, The Centers for Medicare and Medicaid Services (CMS) will review any rate increase greater than 10 percent. While CMS does not have the ability to reject a rate increase, it can publicly declare rates to be unreasonable, which would make it difficult for the company to attract individuals to purchase these insurance plans.”

Moody's noted in its report that its outlook is just that: a high-level observation based on early returns.

“We will need to see how the 2014 experience unfolds along with the effect of the ACA risk-mitigation programs (reinsurance, risk adjustment and risk corridors) before we can analyze this development,” it said.

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