OREANDA-NEWS. November 25, 2015. Weak margins on enrollees who obtain their health insurance coverage under the Affordable Care Act's (ACA) exchange-based system have triggered symptoms affecting large and small US health insurers, says Fitch Ratings.

The largest health insurance provider in the US, UnitedHealth Group (UHG), this week revised its 2015 earnings per share guidance downward by approximately 4%, reflecting pressure from exchange-compliant products related to 2015 and 2016 policy years, according to the company. So far, no other large health insurers have issued similar downward profit revisions.

For small health insurance providers, the effects have been more severe. Numerous cooperative health insurance exchanges formed to write health insurance sourced as part of the ACA implementation have already ceased, or are planning to cease, operations due to underwriting losses. Disbanding such cooperative schemes curtails a potentially significant source of new business for entrants looking to compete in the system.

In spite of the relatively low profit contributions from exchange-sourced members, large insurers participate on exchanges with the goal of helping absolute profit growth. However, Fitch believes that large and geographically diverse health insurers are unlikely to experience credit problems from the weaker margins of exchange-sourced business, as it will unlikely become a significant portion of these large firms' overall business. On the other hand, health insurers with single- or limited-state membership concentrations could have their ratings affected due to higher relative contributions from exchanged-sourced business. In October, Fitch revised Health Care Service Corp.'s Rating Outlook to Negative due to profitability concerns, related in part to exchange-related business.

Significant rate increases are being pursued as a key counter lever to weak profitability from exchange enrollees. Insurers are also narrowing provider healthcare networks to reduce their costs.

Since the ACA became law, Fitch's view has been that the US government's public policy goal of promoting affordable health insurance would go largely as predicted: add to membership volumes, but reduce member margins. This margin pressure could be exacerbated by the US government's challenging fiscal condition, employers' ongoing desire to reduce health care costs and a heightened need to invest heavily in technology.

As a result, Fitch believes that size and scale (and the expense efficiency they bring) are quite important to health insurers' competitive positions and financial results. In addition, the importance of possessing strong capabilities among product lines (i.e. individual, group, Medicare, Medicaid) will increase in response to the government's increasing role in the market, the aging US population and employers' desires to reduce health care costs.

Downward earnings revisions such as UHG's and the failure of various co-ops may add to skepticism about the workability of exchange-sourced memberships and the viability of the risk pools being formed via exchange membership.