Health insurers will likely be hurt by slowing economic growth and high inflation, though only modestly, an August report by financial services company Moody’s showed.

Unlike hospitals, insurers will be less exposed to supply chain issues, higher interest rates and labor shortages. However, insurers that own hospital systems, clinics and medical practices may experience increased costs if labor shortages continue, Moody’s said. This includes UnitedHealth Group, Humana and Highmark Health.

Slow economic growth

Lagging economic growth could lead to job losses, which would make commercial enrollment drop. The report compared this phenomenon to the 2008 recession, when commercially-insured individuals accelerated their use of medical care because they were afraid of being laid off. This led to an increase in claims, raising costs for insurers.

“If economic growth continues to slow and layoffs rise, we would expect a similar increase in utilization today,” the report said. “Slowing economic growth could also impair the industry’s investment results and make it harder for insurers to raise capital.”

However, Moody’s cited two reasons for why insurers are in a better position now than they were in 2008:

• Medicaid and Medicare Advantage are larger now than they were in 2008, which would soften the blow of any unemployment-related enrollment declines. Medicaid and Children’s Health Insurance Plan enrollment reached about 88 million people in March, compared to 50 million in 2008. Medicare Advantage has more than tripled in size since 2008 to over 26 million members, Moody’s said.
• Health insurers are more diversified in their services now than they were in 2008. Many own non-insurance assets, like pharmacies and health information services. This includes UnitedHealth, Cigna, Humana and Elevance Health.

Inflation

Inflation may challenge health insurers, though not as much as other sectors. Because health insurance is renewed annually, insurers have more flexibility, Moody’s said. Premiums are repriced each year to factor in medical inflation, expected medical costs and utilization levels.

“As medical costs represent about 85% of premiums and premiums are the bulk of revenues at almost all the health insurers, if medical costs are correctly estimated, inflation should be manageable,” the report stated. “If medical costs are incorrectly estimated, the industry can adjust in a year.”

But while it can be managed short-term, inflation that lasts two years would be more difficult to deal with. When inflation persists, providers demand higher reimbursements from commercial insurers because they typically receive smaller reimbursements from Medicaid and Medicare Advantage.

“If the government does not increase reimbursements enough to cover inflation, providers would seek higher commercial reimbursement to make up the difference,” Moody’s said.

When this happens, increases in commercial premiums may surpass the rate of inflation. Since small businesses with less than 50 employees are not required to provide insurance, some could drop coverage. These smaller companies account for about 25% of all workers, according to the U.S. Census Bureau. 

“Therefore, inflation could indirectly put downward pressure on commercial enrollment, a key driver of earnings for the industry,” the report said. “In a scenario that features both higher unemployment and inflation, there could be intensified pressure on commercial enrollment.”

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