Health insurers likely to be hurt by slowing economic growth and high inflation, albeit only modestly, in August report from the financial services company Moody’s showed.
Unlike hospitals, insurers will be less exposed to supply chain issues, higher interest rates and labor shortages. However, insurers that own hospital systems, clinics and medical practices may experience increased costs if labor shortages persist, Moody’s said. This includes UnitedHealth Group, Humana and Highmark Health.
Slow economic growth
A slowdown in economic growth may lead to job losses, which will cause enrollment in trades to decline. The report compares this phenomenon to the 2008 recession, when commercially insured individuals accelerated their use of medical care because they feared being laid off. This led to an increase in benefits, which increased costs for insurers.
“If economic growth continues to slow and layoffs increase, we would expect a similar increase in utilization today,” the report said. “Slowing economic growth could also hurt the industry’s investment performance and make it more difficult for insurers to raise capital.”
However, Moody’s cited two reasons why insurers are in a better position now than they were in 2008:
- Medicaid and Medicare Advantage are both larger now than they were in 2008, which would cushion the blow from any unemployment-related enrollment declines. Enrollment in Medicaid and the Children’s Health Insurance Plan reached about 88 million people in March, up from 50 million in 2008. Medicare Advantage has more than tripled since 2008 to more than 26 million members, Moody’s said.
- Health insurers are more diverse in their services now than they were in 2008. Many own non-insurance assets, such as pharmacies and health information services. This includes UnitedHealth, Cigna, Humana and Elevance Health.
Inflation can challenge health insurers, although not as much as other sectors. Because health insurance is renewed annually, insurers have more flexibility, Moody’s said. Premiums are reevaluated each year to take into account medical inflation, expected medical costs and utilization levels.
“Since medical costs account for about 85% of premiums, and premiums are the majority of revenue for almost all health insurers, if medical costs are properly priced, inflation should be manageable,” the report said. “If medical costs are mispriced, the industry can correct itself in a year.”
But while it can be managed in the short term, inflation that lasts for two years would be more difficult to manage. When inflation continues, providers demand higher reimbursements from commercial insurers because they typically receive smaller reimbursements from Medicaid and Medicare Advantage.
“If the government does not increase reimbursements enough to cover inflation, suppliers will seek higher commercial reimbursements to make up the difference,” Moody’s said.
When this happens, increases in commercial premiums may outpace the rate of inflation. Since small businesses with fewer than 50 employees are not required to provide insurance, some of them could opt out of coverage. These smaller companies account for about 25 percent of all workers, according to the U.S. Census Bureau.
“Consequently, inflation may indirectly put downward pressure on commercial bookings, a key revenue driver for the industry,” the report said. “In a scenario that includes both higher unemployment and inflation, there could be increased pressure on commercial bookings.”
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