Moody's Outlook Dour on 'Young Invincibles'

Many of the people in the 18-to-24-year-old demographic who've signed up for coverage under health insurance exchanges may be among the least healthy in their cohort, says Moody's Investors Service.

Despite assurances from the Obama Administration that growing numbers of "young invincibles" are signing up for coverage on the health insurance exchanges, skeptics including analysts at Moody's Investors Service remain fearful that the risk pool will remain skewed towards older and sicker Americans.

Last week the Department of Health and Human Services released the latest enrollment figures for the exchanges through late Dec. 28. While the pace of the sign-ups increased about seven-fold in December—nearly 1.8 million people signed up for coverage that month—only about 24% of the new enrollees were in the coveted 18-34-year-old age group.

HHS officials said they saw an eight-fold increase in the numbers of young adults signing up for coverage, but the totals so far are well below the 40% threshold that Obama Administration officials had hoped for. With that in mind, Moody's Investors Service said this week that the preliminary healthcare exchange demographics are a credit negative for health insurers.

"The enrollment statistics show that only 24% of those who have enrolled in the exchange for private healthcare insurance are in the critical 18-34-year-old age group, well short of the 40% target based on the proportion of eligible people in this age group," Moody' said.

"The way the exchange products are structured and priced, a sizable portion of these healthy individuals must enroll so their lower claim costs can subsidize the higher anticipated claim costs of less healthy individuals."

Moody's said health insurers mandated to provide coverage for a risk pool that is skewed towards older and less-healthy people would see higher medical costs and reduced earnings in 2014, and would find themselves pressed to raise premiums in 2015. "Neither outcome bodes well for a vibrant insurance exchange, which insurers had been counting on for increased revenues and income," Moody's said.

The bond rating agency noted that WellPoint, Inc. (Baa2 stable) and Health Net, Inc. (Ba3 positive), are particularly exposed to potential losses because they have aggressively taken part in the exchanges.
HHS officials said there is still plenty of time for young adults to sign up for coverage before the enrollment period ends on March 31.

A new marketing effort was launched this month to encourage younger people to enroll. And Obama Administration officials noted that Massachusetts saw similar enrollment patterns with younger people when that state mandated universal coverage several years ago.

Still, Moody's analysts were not assuaged.

"Despite the Obama administration's optimism, we continue to have doubts about the enrollment outlook based on the economics of the situation for those not receiving a government-provided subsidy to offset premiums," Moody's said.

"The economics for healthy young individuals do not provide much incentive for them to sign up. For those not eligible for a subsidy, a low-cost plan on the insurance exchange will cost more than $100 per month and will carry a high deductible of several thousand dollars. On the other hand, the penalty for not having health insurance during 2014 is minimal (for an individual, it is limited to the greater of $95 or 1% of income)."

Clare Krusing, spokeswoman for America's Health Insurance Plans, says payers aren't making any rash assessments about the risk pool in the middle of enrollment. "We are still in January and we still have to go through the entire open enrollment process to really understand and at the end of the six-month period what those numbers are going to mean for the marketplace," she says. "But there is broad agreement that you have to have broad participation from young and healthy people for all of these reforms to work."

Moody's said it suspects that many of the people in the 18-to-24-year-old demographic who've signed up for coverage may be among the least healthy in their cohort or they may be covering specific healthcare expenses in the coming year, such as young couples needing maternity benefits. If suspicions prove to be correct, the cohort will not provide the financial support needed to cover the higher medical costs of older enrollees, Moody's said.

In addition, Moody's said a considerable percentage of the 18-34-year-old demographic could potentially cancel its policies after a few months. "The probability of cancellation may be higher for those who purchased a policy as a result of a marketing push rather than a perceived need," Moody's said.

"Although these individuals may have been convinced of the value of a comprehensive health insurance package, the monthly premium requirement, along with a lack of need to obtain medical care, may cause them to re-evaluate."