News Column

Fitch: US Subsidy Appeal Could Hamper Health Insurer Growth

July 22, 2014



NEW YORK--(BUSINESS WIRE)-- A curtailing or elimination of insurance subsidies for those enrolled via the federal exchange under the Affordable Care Act (ACA) could reduce growth prospects for U.S. health insurers, according to Fitch Ratings, although it remains unclear to what extent, if at all, subsidies will change.

Early Tuesday, a U.S. appeals court in Washington ruled that the federal government cannot provide subsidies for those who purchased plans via the exchanges. Shortly thereafter, a U.S. appeals court in Virginia ruled that federal financial aid can indeed be provided to consumers who buy insurance on the exchanges.

We believe any disruption to the subsidy will raise the price and reduce the attractiveness of exchange-sourced health plan enrollment. This could once again add uncertainty around enrollment trends and exchange-sourced business' profitability.

The change to subsidies will significantly reduce growth prospects as health insurers have been relying on exchange sourced business as a source of enrollment and revenue growth. The ruling also raises questions regarding adverse selection since healthy individuals are more likely to let their insurance lapse absent the subsidy versus unhealthy people.

If implemented, we believe that the Washington court's decision is likely to have disparate results among health insurers with exchange-sourced enrollment in various states since it eliminates subsidies to those who buy on the federal government's health insurance exchange but does not eliminate subsidies for those who buy on state sponsored health exchanges.

Fitch continues to believe that health insurers' 2014 margins face pressure from the implementation of industrywide fees designed to fund certain ACA provisions, lower Medicare Advantage funding levels, and potentially higher utilization rates. Expectations for enrollment and revenue growth tied to the exchanges has mitigated these concerns somewhat. If the Washington ruling stands, exchange-related growth's effectiveness as a margin compression mitigant is likely to be significantly reduced.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings

Mark E. Rouck, +1 312-368-2085

Senior Director

Corporate Finance

or

Kellie Geressy-Nilsen, +1 212-908-9123

Senior Director

FitchWire

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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