U.S. Health Insurers: A Cloudy Prognosis

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In addition to recessionary and competitive challenges, the sector must also contend with changes linked to national health-care reform, which we see as a high priority for the Obama Administration in the second 100 days. We've yet to see a real consensus about what health-care reform will look like, but we believe that we could see a health-care reform bill emerge before September. Amid the Washington debate over health care, insurers have worked hard to position themselves as ongoing players in any new health care system.

To this end, they have been strongly engaged to justify their value and role in the pursuit of wider access to affordable care, either individually or through America's Health Insurance Plans (AHIP), the primary industry lobbying group. More recently, President Obama was joined by constituents representing a broad cross-section of the health-care industry to announce a joint commitment to achieve what they consider to be a sharp reduction in the growth of national health spending. Their target, which corresponds with the Administration's goal, is to reduce the rate of spending growth by 1.5% each year for the next 10 years, which is expected to generate $2 trillion or more in savings. Ultimately, challenges are likely to emerge as specific proposals take shape. Several industry experts have cited concerns about the potential for turf battles and enforceability provisions.

All Eyes on Washington

One potentially unfavorable scenario for the health insurance industry would be migration to a universal health-care model with broad-based price and utilization controls. Under this scenario, it would be more difficult for health plans to differentiate themselves. The need for specialty companies—such as network management companies—would end, but there would be a greater need for benefit design, such as wellness incentives and disease management capability if insurers want to differentiate themselves from their competitors.

We believe that without the ability to compete on network costs or benefit design, health plans would likely consolidate into large claim-processing vendors for the government. To date, federal health policy has endorsed public/private partnerships and, contrary to a worst-case scenario, we believe that the private sector is likely to remain engaged in the financing, coordination, and delivery of health care.

Although the state of the economy is the big issue for most of 2009, we believe that some health insurers will be challenged to sustain their credit profiles in the coming year, while others can be expected to maintain the rating on them through the credit strains of this cyclical downturn. This mix of companies includes some of the larger diversified health insurers as well as some of the more localized plans that have strong balance sheets and are in areas of the country less hard-hit by the recession.

Waiting for Recovery

The larger companies are likely to benefit from geographic diversity and a meaningful combination of insured and fee-based business, giving them some added measure of protection from regional economic woes and underwriting risk. But we believe that regardless of size or location, almost every health insurer will spend 2009 hoping that the economy turns around soon—and that any Washington reforms leave them with a viable business in the years ahead.

Marinucci is a credit analyst for Standard & Poor's Ratings Services . McNatt is a senior features editor for Standard & Poor's Securities Services .