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MAY 23, 2016 09:48 AM (EDT)

A.M. Best Special Report: Health Insurers Increase Borrowing Due to the Patient Protection and Affordable Care Act Impact

 Doniella Pliss
Managing Senior Financial Analyst
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Craig Draghi
Financial Analyst
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Jason Hopper
Senior Industry Research Analyst
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Jim Peavy
Assistant Vice President, Public Relations
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OLDWICK - MAY 23, 2016 09:48 AM (EDT)
U.S. health insurance carriers have increased the amount of borrowed money on their statutory balance sheets by nearly 100% over a four-year period, to approximately $6.4 billion at year-end 2015 from just under $3.3 billion in first-quarter 2011, according to a new A.M. Best special report.

The Best Special Report, titled, “Health Insurers Increase Borrowing Due to the Patient Protection and Affordable Care Act Impact,” notes that the financial leverage for the health industry has increased to more than 30% due to mergers & acquisitions and is expected to increase to well above 40% with the completion of two large mergers that are pending (i.e., Anthem Inc.-Cigna Corporation and Aetna Inc.-Humana Inc.). While growing debt at publicly traded managed care organizations was driven by large-scale acquisitions, higher borrowing at statutory entities is partially tied to challenges brought by the Patient Protection and Affordable Care Act (ACA) and exchange products. The traditional health insurance cash flow model relies on monthly receipt of full premium payment prior to any claims payments. However, in the first several years of exchange operations, premiums were heavily dependent on government retroactive risk stabilization programs. In addition, there have been some timing fluctuations in payments of direct government premium subsidies. Therefore, health insurance carriers offering exchange products had to utilize more of their own liquid funds to pay claims, while recording sizeable receivables for future payments from the government.

To alleviate cash-flow pressure the ACA has created, health insurers have increased their borrowing capacity to support sufficient liquidity levels and cash availability. With cost of borrowing at historic lows, carriers are taking advantage of the opportunity to support the business without incurring significant interest expense. Expanded borrowing has resulted in an increasing trend of financial leverage as the average borrowed-money-to-capital ratio for health operating companies grew from 3.2% in 2011 to 5.2% in 2015.

On average, the top 10 companies (by borrowed funds) utilized just about 50% of their borrowing capacity as of year-end 2015, leaving room for additional borrowing in the event of increased cash-flow pressure or other unfavorable developments.

To access a copy of this special report, please visit .

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