Weiss Ratings: Health Care Reform Could Cost Health Insurers Far More Than Expected

JUPITER, Florida (August 11, 2010) – Compliance with a key provision of the new health reform law could cost the nation’s health insurers far more than most analysts expected, according to a new study by Weiss Ratings, the nation’s only provider of independent insurance company ratings.

Weiss found that companies already complying in 2009 had average net profit margins of only 0.7%, while those not yet complying had average net margins of 6.3%, or nine times more.

Martin D. Weiss, president of Weiss Ratings, commented: “As long as their investment incomes hold up, most large insurers should be able to handle the increased medical expenses expected under the new health care reform. If investment income declines significantly, however, few insurers will be able to comply without debilitating impacts to their bottom line, and ultimately, their financial stability as well.”

Starting next year, the Patient’s Bill of Rights will require individual and small group insurers to spend at least 80% — and large group insurers to spend at least 85% — of their premium dollars on medical care and on efforts to improve the quality of care. In addition, other provisions of the law, including requirements to cover certain groups with pre-existing conditions, are also expected to drive medical expenses higher.

To gauge the impact of the reform on the industry’s earnings, the Weiss study covered 543 health insurers,1 distinguishing between two groups:

* 226 “not-yet-compliant” companies — those that spent less than 85% of their premiums on medical expenses in 2009.2

* 317 “already-compliant” companies — those that already spent 85% or more of their premiums on medical expenses in 2009.

Weiss found that:

1. Including income from both their insurance underwriting operations and from their investments, the “already-compliant” companies earned a total of $1.74 billion, or an average of $5.5 million each. In contrast, the “not-yet-compliant” companies earned far more — $7.68 billion, or an average of $34 million each. As cited above, their net margins were 0.7% and 6.3%, respectively.

2. Underwriting income, the difference between premiums collected and medical claims paid, is naturally the income category primarily responsible for the sharp differences. Thus, as a group, the “already-compliant” companies lost $372 million on their insurance operations, with an average underwriting margin of a negative 0.2%. Meanwhile, the “not-yet-compliant” companies earned $6.11 billion with an average underwriting margin of 5%.

3. The overall size of the insurer was also a factor because larger companies tend to have more investment income, making it possible for them to afford higher medical expenses per premium dollar. However, the contrast between the two groups was still great despite size differences:

* Among smaller health insurers (with less than $1 billion in assets), “already-compliant” companies had an average net profit margin of only 0.6%; while “not-yet-compliant” companies boasted an average of 4.5%, or 7.5 times more.

* Meanwhile, among larger health insurers (with $1 billion or more in assets), the “already-compliant” group had net margins of 0.9%, and the “not yet compliant” enjoyed an average net margin of 9.9%, or 11 times more.

The key findings in the Weiss study are summarized below:

Number of Insurers
Under-writing Profits ($millions)
Under-writing Profit Margins (%)
Net Profits including investment income ($millions)
Net Profit Margins (%)
All health insurers in study:

"Already-compliant" - Insurers with medical expense ratio of 85% or more:
Both large and small companies:
Large only ($1 billion in assets or more):
Small only (less than $1 billion in assets):

"Not-yet-compliant" - Insurers with medical expense ratio of less than 85%:
Both large and small companies:
Large only ($1 billion in assets or more):
Small only (less than $1 billion in assets):


Weiss concluded: “Although the health care reform bill is expected to deliver significant benefits to consumers, Congress and state insurance commissioners should keep a watchful eye on the overall financial health of the industry, while consumers should be especially careful to do business with companies that have the wherewithal to promptly pay claims despite increased costs.”

To help consumers avoid the weakest health insurers and find the strongest, Weiss Ratings has released its lists of the 118 strongest and 100 weakest health insurance companies. Consumers can immediately receive both lists at no charge by providing their email address at www.weissratings.com/healthlists.

About Weiss Ratings

Weiss Ratings accepts no payments for its ratings from rated institutions. It is among the nation’s leading providers of independent ratings on 8,000 U.S. banks and S&Ls and the only provider of independent ratings on the nation’s 4,200 insurance companies.

Earlier Weiss studies on the health insurance industry were the primary basis for reports to Congress by the Government Accountability Office (GAO) and by Senator Edward Kennedy. Weiss outperformed Standard and Poor’s, Moody’s, A.M. Best and Duff & Phelps (now Fitch) in warning of future life and health insurance company failures according to a landmark study by the U.S. Government Accountability Office (GAO), while also outperforming its competitors in identifying the strongest insurers, according to its follow-up study using the GAO’s research methodology. According to a leading consumer publication’s May 2009 study of life insurance ratings by Fitch, Moody’s, S&P, A.M Best and Weiss Ratings, Weiss Ratings (formerly TheStreet.com Ratings) “was the toughest grader with independent and objective ratings.”

Thanks to its strong track record and independence, The New York Times wrote that Weiss was “the first to see the dangers and say so unambiguously,” Barron’s wrote that Weiss is “the leader in identifying vulnerable companies” and Esquire concluded that Weiss Ratings is “the one company [that] … provides financial grades free of any conflicts of interest.”

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Note to Editors: This is the second of two releases on the health insurance industry. For the first release, focusing on coverage expansion under the new healthcare reform legislation, click here. State-specific lists of health insurers’ ratings are available upon request.

Companies domiciled in California were excluded because they do not provide the needed data on investment and premium income.

Although large group insurance will be subject to a higher requirement, other provisions of the health reform law will also drive up expenses, with average medical expense ratios expected to rise to 85% or more overall. Therefore, the 85% level was chosen as the cut-off to distinguish between the two groups.