Health insurer outlook is stable despite headwinds: Moody’s

As 2023 draws to a close, Moody’s Investors Service said in a recent report that the full-year outlook for health insurers remains stable despite upcoming challenges from changes to Medicare Advantage star ratings and the GLP-1 class of weight loss drugs.

Citing a decline in Medicaid memberships due to the resumption of eligibility reviews, Moody’s projects lower revenue growth for health insurers this year even though their Q3 earnings met Q2 performance and the industry’s stability is in line with expectations.

However, the firm said that financial results across the industry met its forecasts despite certain unforeseen headwinds, such as a spike in medical utilization among Medicare Advantage members.

In June, UnitedHealth (NYSE:UNH), the largest managed care player in the Medicare Advantage market, warned that the post-COVID normalization of care utilization among seniors would hurt its Q2 medical care ratio.

UNH shares, along with those of its main rival in the MA market, Humana (NYSE:HUM), fell in reaction alongside their peers, Alignment Healthcare (ALHC), Clover Health (CLOV), and CVS Health (NYSE:CVS).

Moody’s argues that while higher MA utilization continued into Q3, the trend stabilized but without an improvement.

Despite a disruption to health insurers from ongoing Medicaid redeterminations as expected, its year-to-date impact has so far been “relatively small,” the analysts argued, adding that most members who lost coverage are expected to enroll in other health plans.

During the pandemic, a three-year pause in eligibility reviews led to a 32% rise in Medicaid memberships among market players such as Centene (NYSE:CNC), Elevance Health (ELV), and Molina (MOH).

“As expected, this is somewhat reducing the earnings growth rate of the health insurers we rate, but it is only one of several drivers of this trend,” the analysts wrote, adding that “we expect that most of the disenrollees will re-enroll in the individual market or in employer-based insurance.”

However, Moody’s expects long-term implications from how Medicare Advantage star ratings are calculated. The annually updated system categorizes MA plans on a one-to-five performance-based scale, and plans with a rating of four or five stars are eligible to receive bonus payments when they seek Medicare reimbursements.

In October, Elevance (ELV) shares fell after disclosing that the percentage of its MA members in plans with ratings of four stars or higher had dropped to 34% for the 2024 rating year from 64% a year ago.

Other notable trends in the industry include highly popular but costly weight-loss drugs known as GLP-1 receptor agonists from Novo Nordisk (NVO) and Eli Lilly (LLY).

Moody’s argued that while health insurers can reflect their costs in policy rates, it’s a risk for their corporate clients if GLP-1 usage is not managed correctly.

“Health insurers can include these costs in policy prices,” the analysts wrote, adding that “however, for corporate clients who contract with health insurers for administrative services only and otherwise self-insure, the risk is higher, especially if utilization is not effectively controlled.”