U.S. health insurance market faces big change with Trump: Fitch

The election of Donald Trump as the next president of the United States, and the Republican party retaining control of both houses of Congress, will significantly increase the probability of the repeal and replacement of the Affordable Care Act (ACA), says Fitch Ratings. Repeal of the ACA would be credit positive for the health insurance sector and have wide-ranging implications for the broader U.S. health insurance market.

The implications of an ACA repeal are relatively predictable but the effects of the replacement legislation are much less so. Retaining certain key aspects of the ACA, albeit through the passage of a new law, is a possibility. Republicans will likely balance their interests in meeting campaign promises to repeal the act while not alienating voters who had historically been uninsured prior to the ACA’s implementation.

Repealing the ACA is likely to enhance insurers’ underwriting flexibility and give rise to more varied product design (e.g. low-cost catastrophic coverage favored by younger and healthier consumers) and pricing capabilities that reduce adverse selection risk in the individual and small group markets that resulted from provisions of the ACA. While these changes would cut across the entire health insurance market, financial results of insurers currently offering products on the ACA’s health insurance exchanges are most likely to benefit from these changes. Generally, these insurers are more likely to be non-profit insurers.

Repealing the ACA is also likely to result in significant operational changes as insurers face the need to design new products, alter provider networks and adapt systems capabilities to meet the needs of current market dynamics. Fitch believes that insurers have proven capabilities in adapting to regulatory changes that mitigate these operational concerns.

Depending on the manner in which the ACA is replaced, for-profit insurers who have announced large scale withdrawals from the health insurance exchanges in recent months could be drawn back into the market for individuals currently covered by exchange-related products. The extent to which these companies return will rely heavily on the manner in which their concerns about structural issues are addressed.

Fitch’s sector outlook for U.S. health insurance is negative, reflecting high acquisition-related financial leverage and, to a lesser extent, profitability concerns derived from health exchange-sourced membership. The ACA’s repeal will alleviate these profitability concerns but is unlikely to result in an outlook revision to stable in light of the significant uncertainty surrounding the implications of its replacement.