A.M. Best Comments on Potential Impact of Medicare Legislation to Health Insurers.

OLDWICK, N.J. -- A.M. Best Co. expects that health insurers will take measures to counteract the impact of the passage of bill H.R. 6331, which would impact plans participating in Medicare Advantage (MA). Bill H.R. 6331 has many provisions, but the largest potential impact to private MA plans are: the elimination of deeming on the MA Private Fee For Service (PFFS), the elimination of Indirect Medical Education (IME) payments, the elimination of the regional MA stabilization fund and the extension/expansion of MA Special Needs Plans (SNP) for chronically ill individuals.

Historically, when Congress has passed legislation that resulted in a reduction in Medicare funding, insurers modified benefits, increased premiums and exited markets where the program could not be profitable. A.M. Best expects a similar impact from the passage of Bill H.R. 6331.

The elimination of deeming on the MA PFFS would require plans to have an established network in place by 2011. The bill exempts areas with fewer than two network plans available. The elimination of the IME payments is likely to impact plans with a high urban-based Medicare population where large teaching facilities are located. The elimination of the stabilization fund will impact regional MA plans. While this stabilization fund already had a phase-out provision, this bill accelerates that schedule. The extension/expansion of MA SNP for individuals who are chronically ill will provide MA coverage and care management to participants who are currently not part of an MA program.

A.M. Best expects current MA insurers to evaluate the impact of these changes. Insurers may decide to either comply as in the case of PFFS, modify benefits/premiums to offset impact to margins, or potentially withdraw from the program either in its entirety or from select geographic areas. Overall MA enrollment could be impacted by the enactment of this legislation. As in the past, insurers will evaluate whether to remain in the program, increasing premiums could potentially force some individuals to return to traditional Medicare and future enrollees will evaluate the programs available and cost in electing coverage. Individuals will also evaluate other MA plans available in their areas before making a decision to return to traditional Medicare. While overall the future growth rate could be lower than the recent past, shifts could occur within companies to different coverage options or another insurer offering a plan in the same geographic area. Individuals may elect a Medicare Supplement plan with traditional Medicare in place of an MA plan, which is similar to what occurred in the past. Medicare Supplement sales have been declining due to the increased offering of MA plans, including PFFS, and growth in Medicare Supplement sales could occur should insurers withdraw from MA.

A.M. Best anticipates that smaller geographically concentrated companies may elect to opt out of the program as the potential cost impact could be too much to bear. For larger diversified companies, modifications of their existing products and offerings are the most likely outcome. The financial impact upon implementation of this bill could put additional pressure on insurers to maintain/improve profitability on the commercial market, a segment that is already facing competitive and economic pressures. Furthermore, the potential for consolidation among insurers could increase as smaller companies look for alternatives.

A.M. Best's current outlook for the health insurance sector is stable; however, with risks on the rise, A.M. Best may revisit its outlook for the sector in the near term.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.