The long-term credit profiles of large U.S. health insurers participating in state Medicaid managed care programs should not be significantly affected by the recently reported increases in utilization in the Medicaid population, Fitch Ratings says.
Modest, short-term margin pressure should emerge in the Medicaid line of business.
Fitch Ratings reports that increased Medicaid utilization will not significantly impact the long-term credit profiles of major U.S. health insurers involved in state Medicaid managed care programs. However, they may face short-term margin pressures in the Medicaid sector.
The Consolidated Appropriations Act, passed in late 2022, ended the Medicaid continuous enrollment provision on March 31, 2023.
This provision had been established by the Families First Coronavirus Response Act at the pandemic’s start. Consequently, states began redetermining Medicaid eligibility on April 1, 2023, for the first time since early in the pandemic (see How Many Medicaid Enrollees Disenrolled from U.S. Health Insurance Program?).
Initially, the U.S. Department of Health and Human Services estimated that up to 15 million out of 94 million individuals covered by Medicaid and the Children’s Health Insurance Program would lose coverage due to redetermination.
However, disenrollments have surpassed these expectations. As of June 4, 2024, 77% of eligibility redeterminations have been processed, resulting in the disenrollment of at least 22.8 million individuals, as reported by KFF.
KFF’s analysis indicates that 69% of disenrollments occurred due to procedural reasons. These can include outdated contact information or failure to complete the renewal application on time, often because the beneficiary did not open the relevant mail (see Costs for Employer Healthcare Insurance Top Trends).
Senior executives from companies with substantial Medicaid operations have noted higher than expected utilization rates among remaining Medicaid beneficiaries.
Rapid changes in the risk pool’s composition have led to uncertainties about rate adequacy. The exact reasons for the increased acuity among remaining beneficiaries are unclear, but adverse selection due to high procedural disenrollments may be a factor.
Beneficiaries who suffer from chronic illness or otherwise frequently use healthcare services are more likely to have more up-to-date contact information, and those otherwise eligible who find themselves needing healthcare services are more likely to discover that they have been disenrolled from Medicaid and will reapply with updated information.
If they still qualify for Medicaid, they can typically have their Medicaid coverage renewed with possible retroactive reimbursement for care received while they were disenrolled.
Fitch’s outlook for U.S. Health Insurance Sector in 2024 remains neutral. Prolonged higher interest rates will remain more of a boon for U.S. health insurers in the coming year, although that benefit has a limited shelf life.
Health insurers typically have short duration asset portfolios comprised primarily of high quality fixed-income investments, so higher rates have been a benefit with proceeds from their existing bonds able to be reinvested at higher current rates
Brad Ellis, Fitch Senior Director
Conversely, a portion of eligible individuals who are not currently in need of healthcare services may not be aware that they have been disenrolled, which results in the insurance company receiving no premium revenue for those healthier individuals.
Despite higher utilization rates, insurers expect the resulting margin pressures to be temporary. Rate setting discussions with states should adjust for higher acuity levels.
Diversification into commercial group and individual exchange markets will help offset Medicaid margin pressures. Additionally, higher interest rates will continue to benefit the investment income from insurers’ large, high-quality bond portfolios.
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