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Fitch expects BCBS companies' 2015 earnings to fall

Blues insurers grapple with nonprofit status, ACA exchange losses

Citing a host of challenges that include higher-than-expected cost and utilization trends in the state health insurance exchanges, Fitch Ratings says in a new report that it expects Blue Cross and Blue Shield (BCBS) companies' earnings to decline for 2015.

Twenty-three out of the 35 BCBS companies reported a total $1.9 billion decline in earnings for the first nine months of 2015, Fitch says, and 16 reported net losses. The largest contributors to the overall earnings decline were Highmark, Health Care Services Corp. and Blue Cross Blue Shield of Michigan.

Fitch traces these sagging earnings to factors such as difficulty generating adequate capital while maintaining nonprofit status, adding scale and operational efficiency, unfunded pension plan obligations and concentrated geographies.

Insurers are also under pressure to reduce costs while maintaining service levels and expanding access--Fitch believes this requires insurers to significantly invest in information technology solutions that share data with providers and members to help achieve these goals.

Still, the BCBS companies' ACA-related losses are the "primary drivers" of declining earnings, the report says.

Publicly traded insurers including UnitedHealth and Anthem have reported losses on their individual market policies, the former even threatening to exit the exchanges in 2017. However, Fitch says that in contrast to BCBS companies, publicly traded insurers have produced "generally stable earnings trends"--in part because they have different profit motives than the Blues plans.

There are bright spots, though, for BCBS companies. Among their credit strengths are the fact that they have diverse product portfolios that encompass government, individual and employer group products, Fitch says, and they've also built strong provider networks that support large market shares in the regions in which they operate.

In addition, Fitch predicts that the Blues' earnings are likely to improve in 2016 because of the effect of premium rate increases, benefit redesign intended to improve underwriting results and regulatory changes that may reduce adverse selection.

To learn more:
- read the report (subscription required)

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CO-OP failures and United's threatened pullout won't doom the exchanges, report says
Losses lead UnitedHealth to rethink role in ACA exchanges