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AIS's Health Business Daily
Featured Story November 11, 2008 Financial Crisis Could Result in Blues Plans Losses in Members and Investment Earnings Reprinted from The AIS Report on Blue Cross and Blue Shield Plans, a hard-hitting independent monthly newsletter on business strategies, products and markets, mergers and alliances, and financing of BC/BS plans. By Jill Brown, Managing Editor, (jbrown@aispub.com) The worsening financial crisis likely will mean lower-than-expected membership gains for many Blue Cross and Blue Shield plans, as well as lower investment results and possible net losses and enrollment declines for some, warn financial analysts. But the credit crunch causing gridlock throughout the economy and the wild stock market swings are less of an issue for most Blues plans, they say. "Particularly with small groups and direct-pay subscribers, when we get to the next renewal period, they may elect to reduce their coverage" or cancel it altogether, says Christopher Leardini, vice president, controller and treasurer at HealthNow New York, Inc., parent company of Blues plans in upstate New York. "We're taking that into consideration when we're evaluating our growth targets," he tells The AIS Report. "We probably won't know for a little while, but every day that goes by seems to be a worse economic story in the news, and that just gets exponentially worse for some of our employer groups." HealthNow is in the same position as many other health insurers, financial analysts say. A.M. Best Co. has a negative outlook on the health insurance industry because of economic conditions, according to Sally Rosen, a managing senior financial analyst at the financial ratings company. The commercial market already is very competitive "between the layoffs that have occurred and unemployment at a high," she says — and employers likely will be looking for ways to tighten benefit packages in order to reduce premium-rate increases. "The biggest thing I would point to in 2009 is that employment should be down," agrees Shellie Stoddard, a director in Standard & Poor's financial institutions ratings division. "Small businesses will drop [health insurance] coverage just due to the cost and strain." It's harder to predict the impact of the economic crisis on medical costs, analysts say. "Typically, health insurance doesn't see a huge spike in claims in an economic downturn," Rosen says. But she notes that some enrollees may put off getting health care services to avoid out-of-pocket costs, resulting in a temporary decrease in medical claims. On the other hand, "we might also expect a blip in utilization, if people know they're getting laid off and know their coverage is going away," Stoddard says. In addition, Blues plans, like many companies, may find their customers paying premiums later, and some bills may go unpaid altogether. But most insurers likely would cut off coverage quickly if premiums go unpaid. "Health insurers don't really have a credit risk on their policyholders," Stoddard says. But late-paid or unpaid premiums would be more likely to affect "companies with greater individual coverage, rather than group coverage," Stoddard says. "And smaller businesses are probably going to be the most vulnerable to premium collection." "We haven't seen a precipitous drop to date in terms of delinquencies and cancellations because of nonpayment," says Leardini. "It's been pretty steady. But we are concerned — with all the other aspects of the economy, with fuel costs and utilities — how the market may impact it." Blues Are Less Vulnerable to Stock Swings Because health insurance is their primary business, not-for-profit and mutual Blues plans tend to be conservative investors, analysts say. "At health insurance companies, especially nonprofits, a large portion of their investment portfolio is in bonds," says Brad Ellis, a director at Fitch Ratings' Insurance Group. "They earn a lot of interest on those bonds." But health insurers will see lower investment income on those bonds because of the Federal Reserve Board's decision to lower interest rates several times this year, he says. The Fed on Oct. 8 unveiled the latest in a series of interest rate cuts that has halved the base interest rate from 3% in January to 1.5%. The effects of the lower interest rates won't be seen immediately, Ellis says. "But as time goes on, you will see lower interest income [among Blues plans]." Another issue, analysts say, is that the bonds held by health insurers are of shorter duration than those held by life insurers, since health insurers pay out claims more frequently. The result is that their "bond investments are going to turn over more quickly, and then they're going to get locked into a lower rate," Stoddard says. "A life insurer…can extend out its portfolio longer because of longer-duration investments." Leardini says New York insurance regulations require HealthNow to hold about 80% of its investment portfolio in "high-quality fixed-income securities." As a result, "there's not really any direct exposure to the credit crisis and the subprime issues that are going on, but obviously they [i.e., the bonds] experience some indirect impacts from the market." "On the equities side, we hold anywhere from 15% to 20% of the portfolio in equities," he says. "And that is really to diversify the portfolio." Lower investment income may lead some Blues plans to report net losses in 2008 and 2009. "The strategy we're seeing from quite a number of Blues is they're moving to lower margins and in some cases break-even underwriting results," Stoddard says. "If they're relying on their investment income for buildup of surplus,…then we'd certainly expect that to decline in 2009." And although Blues plans tend to be conservative investors, "there is quite a bit of equity-market investment - a surprising amount," Stoddard says. "Companies with the highest capitalization — what you would call excess surplus — may have a higher proportion of their investments in stocks," Ellis explains. "When you have higher capital, you can look more long term and add some risk." Publicly traded WellPoint, Inc. tends to hold a lot of equity investments, according to Carl McDonald, an equities analyst with Oppenheimer & Co. That company held $224 million in investments in Lehman Brothers, American International Group, Inc. (which last month sold 80% of itself to the Federal Reserve in return for a loan of up to $85 billion) and Washington Mutual, Inc. (which last month filed for Chapter 11 bankruptcy protection). WellPoint also holds $243 million in the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), the huge mortgage finance firms that were bailed out by the federal government Sept. 7. In a Sept. 10 filing with the Securities and Exchange Commission, WellPoint said the value of its holdings in Fannie Mae and Freddie Mac preferred stock had dropped by about $214 million. Despite these woes, McDonald says WellPoint is well capitalized. The insurer could write down 28% of its cash and investments and still be in compliance with minimum regulatory requirements, he estimates. Blues Are Shielded From Credit Crunch The deteriorating credit markets are causing problems for many businesses that rely on loans to fund day-to-day operations. But Blues plans typically don't rely heavily on borrowing, analysts say. "Typically, not-for-profit [insurers] you don't see borrowing a lot of money," Ellis says. "They're not issuing a lot of commercial paper," which are promissory notes issued by a bank or corporation to finance short-term cash needs. Health Care Service Corp. (HCSC), for example, used cash for its August 2008 acquisition of MEDecision, Inc., says spokesperson Ross Blackstone. "A company like HCSC is one of the very well capitalized companies," Ellis says. Blues plans that
do access credit markets may do so out of choice. Stoddard points to
BlueCross BlueShield of Tennessee, which is building a new office complex.
"They could have funded it themselves with their capital [since]
they have excess capital," she says. "But they chose to go
to the debt markets.…They accessed the debt markets more because
they could get a better cost of capital." |
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