HCR Provision Could Hit Insurers’ Margins Hard

August 11, 2010 (PLANSPONSOR.com) – Based on the experience of health insurers already complying with a provision of the health care reform law, those that haven’t yet gotten in line could be facing a stiff price for not doing so, a new study asserted.

Starting in 2011, the reform law requires that individual and small group insurers spend at least 80% — and large group insurers to spend at least 85% — of their premium dollars on medical care and on efforts to improve the quality of care.  A news release from Weiss Ratings, a Florida-based consultant that rates banks and insurance companies, said its study of the 2009 financial performance of 543 health insurers found that those not yet complying had average net margins of 6.3% while compliant insurers had net margins of 0.7%

The study also found:

  • Including income from both insurance underwriting operations and their investments, the already-compliant companies earned a total of $1.74 billion, or an average of $5.5 million each. In contrast, the not-yet-compliant companies earned $7.68 billion, or an average of $34 million each.
  • Underwriting income, the difference between premiums collected and medical claims paid, is the income category primarily responsible for the sharp differences. As a group, the already-compliant companies lost $372 million on their insurance operations, with an average underwriting margin of a negative 0.2%. Meanwhile, the not-yet-compliant companies earned $6.11 billion with an average underwriting margin of 5%.
  • Among smaller health insurers (with less than $1 billion in assets), already-compliant companies had an average net profit margin of 0.6%; while not-yet-compliant companies boasted an average of 4.5%, or 7.5 times more. Among larger health insurers (with $1 billion or more in assets), the already-compliant group had net margins of 0.9%, and the not-yet-compliant saw an average net margin of 9.9%, or 11 times more.

“As long as their investment incomes hold up, most large insurers should be able to handle the increased medical expenses expected under the new health care reform,” said Martin D. Weiss, Weiss Ratings president, in the news release. “If investment income declines significantly, however, few insurers will be able to comply without debilitating impacts to their bottom line, and ultimately, their financial stability as well.”

The Weiss study included 226 “not-yet-compliant” companies and 317 “already-compliant.”  More information is at http://www.weissratings.com/.