Fitch Ratings has maintained its negative outlook on the health insurance sector and expects more health insurer rating downgrades than upgrades in the next one to two years.
"Leverage concerns tied to large mergers and concerns about the profitability of business sourced from health insurance exchanges are the key factors underlying Fitch's negative outlooks," said Mark Rouck, senior director of Fitch Ratings, in the credit rating agency's 2017 U.S. health insurance outlook report.
Fitch believes repealing and replacing the ACA under incoming President Donald Trump would be a longer-term credit positive for the sector. However, there is significant near-term uncertainty around the form of the potential repeal and replacement.
Repealing the law would likely enhance insurers' underwriting flexibility, reduce sectorwide fees and promote more varied product design — such as low-cost catastrophic coverage — and pricing capabilities that reduce adverse selection risk that resulted from provisions of the ACA, according to Fitch. Although these changes would affect the entire insurance sector, they will most likely yield the greatest financial benefits to insurers currently offering ACA exchange products.
The plan President-elect Trump has outlined for replacing the ACA includes several key components, such as promoting competition, providing tax incentives for consumers, establishing high-risk pools and changing the way the federal government provides Medicaid funding to states. According to Mr. Rouch, the individual credit and rating implications of these components will vary. "There are likely to be individual winners and losers in such an environment depending on insurers' specific capabilities and circumstances," he said.
Additionally, if the Department of Justice successfully challenges Hartford, Conn.-based Aetna's acquisition of Louisville, Ky.-based Humana and Indianapolis-based Anthem's acquisition of Bloomfield, Conn.-based Cigna and the companies forego acquisition-related financing, Fitch would likely remove negative watches on the companies' ratings, according to the report.