Credit FAQ:

How Is The Transition To An

Exchange-Based Environment
Affecting Health Insurers, Providers,
And Consumers?
Primary Credit Analyst:
Joseph N Marinucci, New York (1) 212-438-2012; joseph.marinucci@standardandpoors.com
Secondary Contacts:
Neal I Freedman, New York (1) 212-438-1274; neal.freedman@standardandpoors.com
Liz E Sweeney, New York (1) 212-438-2102; liz.sweeney@standardandpoors.com
Table Of Contents
Frequently Asked Questions
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Credit FAQ:
How Is The Transition To An Exchange-Based
Environment Affecting Health Insurers, Providers,
And Consumers?
Standard & Poor's Ratings Services held its annual health care conference (Health Care 2014: A New Frontier
Emerges) this month. Joseph Marinucci, a senior credit analyst with Standard & Poor's Insurance Ratings, moderated a
panel focused on the public exchanges that included John Criswell, founder and CEO of Pulse8 Inc.; David Huber,
CFO of Horizon Healthcare Services; and two senior credit analysts with Standard & Poor's Ratings Services: Liz
Sweeney (Public Finance) and Neal Freedman (Insurance). The panelists discussed what the shift to public and private
exchanges could mean for the marketplace.
Frequently Asked Questions
How are public and private exchanges likely to change the insurance market and insurers' business
focus during the next three-to-five years?
John Criswell of Pulse8 Inc. identified three key areas that the exchange system has affected the most. The first is
payment models. Many insurers are shifting to fee-for-value systems from fee-for-service systems, and considering
partially or fully capitated models. Second, new sources of delivery are emerging as retailers such as CVS and
Walgreens that previously only offered episodic care are now providing more services. Finally, insurers have increased
their consumer focus, using new technologies to keep their customers informed and happy.
How will the transition to exchanges change the interaction between health care organizations and
the consumer?
David Huber of Horizon Healthcare Services said that exchanges have elevated the role of the consumer. Most of the
consumer-insurer interaction used to take place through employers' human resource (HR) departments, so the
consumer was rarely dealing directly with his or her insurer. The exchanges more or less remove the HR middle man.
Now, if a consumer has a bad experience, he or she will simply go elsewhere. (In the old model, employers didn't have
that option to the same degree.) Mr. Huber sees an increased need for customer service at insurance companies as a
result of this. Insurers are focusing more on developing self-service and transparency tools such as apps for smart
phones or other devices. Advertising, too, will become more important, especially in the lead-up to the next enrollment
period. Right now, many exchanges list plans primarily according to cost, which has reduced emphasis on brands
somewhat. But insurers still see the benefit in marketing, provided they are able to deliver. It's likely that, as time goes
by, there will be more information in the market about the quality of different insurance plans.
How are exchanges changing the relationship between providers and insurers?
Many hospitals predicted that a shift to lower-priced exchange products from large employer plans under the ACA
would hurt their bottom lines--up to a 20% discount to their existing commercial business according to Liz Sweeney.
However, so far this year, the effects of the ACA have been less dramatic than hospitals projected. Many hospitals
have responded to the uncertainty by collaborating with insurance companies--for example, via "narrow networks," or
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small, select groups of providers with which insurance companies have chosen to make contracts. These networks
have been controversial because some patients haven't been able to see the doctors of their choice. Narrow networks
will likely help the hospitals that are in them (even if they have to offer discount prices) and hurt those that aren't. In
some cases, hospitals are getting into the insurance business themselves, hoping to reduce risk and reap the gains of
lower readmission rates and other improvements in quality--gains hospitals have made, but from which insurers have
benefited. Ms. Sweeney noted that although hospitals have an increased appetite for risk, they may not all manage the
additional risk successfully.
How have exchanges affected competition in the industry and the emergence of new entrants?
According to Neal Freedman, building a network is the biggest barrier to entry in the health insurance business, so new
entrants have to work from a smaller network base--whether they are offering new products in an untested
marketplace or competing with larger, more established players. Therefore, prices at these new companies will be
lower, and success will depend on consumers' willingness to trade network breadth for price. In our view, although
many new entrants have received media coverage and exposure, none have quite established themselves yet.
How healthy are the enrollees so far?
According to David Huber, it's too soon to tell. He noted that prescription drug spending, which is often a good
indicator of medical spending overall, has ticked up, but in his view, this is the result of expensive medications like the
Gilead hepatitis C drug, and not the result of the ACA. Narrow network plans will probably see lower morbidity (the
relative incidence of disease) over time, while the reverse will be true for larger network plans. Those who needed
health care the most were probably the first to sign up, whereas healthier individuals are waiting until the enrollment
deadline. As people learn more about the exchanges and as more healthy people sign up, the market overall should
stabilize, lowering rates and volatility in earnings. Still, as both John Criswell and David Huber pointed out, there will
likely always be folks who don't comply with the individual mandate to purchase insurance--either because people
simply can't afford any plan, even with subsidies, or because they object ideologically.
How accurate was the initial pricing on exchanges?
The initial pricing assumptions were based on different population demographics, and analysts have been constantly
reforecasting them, John Criswell said. Some insurers have seen approximately 50% less membership than they
projected. Data on enrollees in the ACA so far is murky. Right now, it's difficult to determine the accuracy of the
original price projections.
How are we assessing the risk-mitigation provisions?
We believe the three Rs (reinsurance, risk corridors, and risk adjustment)--the risk-sharing provisions included in the
ACA to protect insurers financially during the transition to an exchange system--may look different when implemented
(2015) than they do today. Reinsurance, which aims to offset the risk of sicker individuals enrolling before healthy
individuals, has been the most stable of the three. Under this program, the Department of Health and Human Services
or a state-based agency (intermediary) collects payments from all insurers. The intermediary then reimburses a
percentage of costs once claims reach a certain amount through 2016. This is the one consistent provision of the three
Rs that insurers are booking in their interim 2014 results. Risk corridors, which were designed to stabilize premiums for
qualified health plans, are the most difficult of the three Rs from both a funding and a political perspective. Under this
program, the intermediary redistributes funds (risk is pooled at the state level) from plans with lower-than-expected
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Credit FAQ: How Is The Transition To An Exchange-Based Environment Affecting Health Insurers, Providers, And
Consumers?
claims to plans with higher-than-expected claims, potentially creating a kind of "push/pull" between the government
and the insurers if there is an imbalance in the marketplace. The government wants to appear fiscally responsible while
encourage insurers. Insurers, on the other hand, want to maintain financial strength without the appearance of needing
government help. Risk adjustment is the only one of the three Rs that will be permanent. It requires insurers that cover
lower-risk populations to make payments to insurers that cover higher-risk populations. In our view, this is sustainable
only if the transfers are relatively small (as they are with Medicare Part D). Otherwise, insurers may object to writing
large checks to other insurers, and changes in Washington could follow.
What is the difference between a public and a private exchange, and how might this change?
In a private exchange, an employer offers its employees a choice of insurance products on a website. According to
David Huber, under this system, employers are likely to shift to determining a set amount of money per employee (a
defined contribution approach) from paying a percentage of the expected costs of benefits (a defined benefit
approach). Mr. Huber further commented that success among the public exchanges will be a factor in large employers
deciding whether to move to private exchanges.
What is the future for non-ACA-compliant products, and how will these products affect the market?
Non-ACA-compliant products cover individuals who were insured before the law was passed, meaning they are likely
healthier. Without these people, the ACA pool overall is likely to have higher morbidity. Once some of these
individuals migrate to ACA-compliant products they may be inclined to utilize health services at a higher level, which
may contribute to premium increases. But, according to Mr. Huber, the ACA is here to stay, and noncompliant
products will likely fade out within a couple of years.
What is Standard & Poor's view of the overall effect of exchanges on health insurers?
Overall, the ACA by itself has not resulted in any rating actions, which is a trend that we expect to persist through
2015. We believe that the ACA was designed mostly to operate in conjunction with the existing private-sector
framework. The health insurance business, overall, hadn't been seeing much growth at the commercial level before the
ACA; the law created more opportunity (and risk) for insurers. Thus far, the new rules and regulations have been
considered absorbable and many health insurers appear to be developing a better sense of risk and opportunity with
regard to the possible direction of the marketplace.
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Credit FAQ: How Is The Transition To An Exchange-Based Environment Affecting Health Insurers, Providers, And
Consumers?
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