Slow Job Growth Hurts Insurers This Year

When insurers talk about the future of their business these days, the focus is usually on the sweeping changes included in the Patient Protection and Affordable Care Act. And while those changes will undoubtedly determine the future of the industry in the longterm, it may be the struggling economy that has the bigger financial impact in the short-term.

At least, that's one of the biggest threats identified in a recent report from the KPMG Healthcare and Pharmaceutical Institute.

Throughout 2009, most insurers managed to thrive as the economy faltered, thanks in large part to expense savings and capital gains, the report says. The largest insurers had combined profits of $14.4 billion, an increase of 56% from 2008. Not too shabby.

But publicly-traded insurers also saw a 2.3% decline in commercial membership because of employer layoffs during that time. It may grow more difficult to squeeze out cost savings, and if unemployment continues to remain high, KPMG expects the health insurance market to grow much slower—about 7% annually between form 2009 to 2011.

"Many healthcare companies are finding that their businesses are less recession-resistant than previously thought, and the future is uncertain. Managed care companies are faced with declining enrollment as unemployment remains high in a tough pricing environment. This will undoubtedly be a challenging year," writes James Davenport, partner at KPMG LLC and author of the report.

Add to that the impact of reform—new restrictions and medical-loss ratio requirements, and cuts to Medicare Advantage—and companies will increasingly "face pressure to maintain their profitability."

Although the health insurance mandate will bring up to 32 million new customers, primarily to the individual market, the employer-sponsored health insurance system continues to grow and remains the source of many Americans' coverage. As long as companies are laying off workers or waiting to resume hiring, insurers should be concerned.

So what's an insurer to do when faced with the dual challenges of a bad economy and industry overhaul? If they can't expand membership organically, more may look to do so through mergers and acquisitions, the report predicts. As I wrote in a previous column, the industry has been consolidating for a while, and may face even more pressure to do so in the near future.

While a lot of insurers are still going to be profitable, they may have to pay a lot more attention to overhead and efficiency to make it happen. The KPMG report even predicts job cuts at some insurers struggling to reign in administrative expenses. And that's certainly not going to help the unemployment rate, which is causing the problem in the first place.