Stephen Zaharuk is a Moody's senior vice president who covers the health insurance industry. That makes him the guy who authored the report downgrading the credit outlook for health insurance companies from "stable" to "negative" on Thursday. We spoke Thursday afternoon about his outlook for the health-care industry, the big unknowns looming in 2014, and why the downgrade happened now. Some of his quotes made it into this story in Friday's paper and what follows is a transcript of our discussion, lightly edited for clarity.
Sarah Kliff: In your report on health insurers, you list a lot of different factors that contributed to the downgrade. Can you give any sense of how important each one was? Was it the rocky rollout of the health-care law driving this? Or something else?
Stephen Zaharuk: Each one has an effect. We started with the Affordable Care Act, which obviously has the most interest as the newest piece. Basically we're seeing the rollout, which wasn't as sufficient as it should have been, and we're not seeing the enrollment numbers that were expected, based on the insurers' pricing assumptions. We're also hearing about back-end issues, which haven’t been in the forefront of the news. The more concerning thing is, are they going to get paid the premiums that they need in the exchanges?
Also concerning is the fact that, because of this rollout, there are changes made to regulations. We changed the enrollment dates and extended enrollment for a period of weeks, and kept policies that aren't compliant with the Affordable Care Act for another year. All these things, they are probably not, by themselves, a big worry. But together they add more risk. There's a concern there could be more of these to come. Once you have the precedent of changing a regulation with an announcement like that, that makes the financial landscape uncertain.
That's all to do with the Affordable Care Act. We also have Medicare Advantage which is a big program for insurance companies. About 28 to 27 percent of seniors are signed up for that. In 2014, there was a lowering of the amount they get to provide that care, and they're scheduled to get another reduction. We’re concerned about how far these cuts will go, and how long this will be a viable product. You might see a lowering of benefits, or some might exit the marketplace.
And then there’s just the normal pressures we are seeing because of the economy. Employment is not not as robust as we'd hoped, so commercial membership is pretty stagnant.
SK: I want to follow up on the first issue you bring up, the health-care law's rocky rollout. When I hear from insurance executives, they tend to paint this as relatively unimportant, because exchanges are a small segment of their business, and they always thought the first year would be hard, albeit not this hard. Are they wrong?
SZ: I think that’s true. For most insurance companies, the individual business has been a small part of their portfolio. It's not going to bankrupt the Wellpoints and Uniteds of the world. We also don’t think they’re going to make money on this, and they could possibly lose money on this. It is a small part of their business, and it lowers their credit outlook. Obviously as news trickles out about Affordable Care Act enrollment, and if we get positive enrollment that younger people are signing up, that takes off a bit of the pressure. And if we start seeing more robust employment, that will help too.
SK: What are the big unknowns in 2014 that could tip the outlook for health insurance companies?
SZ: There’s two things. In the open enrollment period we haven’t seen the results and the numbers are coming in that were expected. The indication was the growth wasn't going to be as great as projected. So we're waiting to see those final numbers, and that will be the first indication of how much enrollment was impacted by the rollout. There's also Medicare Advantage. There will be a preliminary rate letter at the end of February which will give us an indication, which they might modify as they did last year. The April number, alongside the final tally of 2014 enrollment, can give us an idea of what 2014 looks like.
SK: I was hoping you could extrapolate a bit on why this is happening now. Is it true that 2014 was always going to be a tough year for health insurers, or are there certain things changing recently that worsened the outlook?
SZ: I think it's because a lot of things were off this year. We didn't know about the problems with the implementation beforehand. We had a stable outlook with a concern going forward. We do mention that the regulatory environment, with the possibility of changes, was one thing that sort of tipped the scale to a negative outlook. It was with the number of other things. It’s hard to pick out one thing that changed it. We saw a lot of things on our radar screen that, on their own, they could handle, but as the challenges kept piling up. that became more of a concern.
SK: One last question on the Affordable Care Act. In your report, you mention that 24 percent of the exchange enrollees are young adults, which is obviously well below the Obama administration target of 40 percent. But health insurers will say that the young adult enrollment is actually pretty close to their own internal targets. So how relevant is the 40 percent target, if that's not what insurers priced to?
SZ: Insurance companies clearly will keep how they set their prices private, although you would expect that most companies did not expect to see a large amount of young people in year one. But if you just look at the policies, it still is a concern going forward. We don't know if they're hitting their targets, but we do know that if there is an older, less healthy population, then clearly the rates are going to be pressured upward.