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Corporate Perspective published on May 1, 2017

Insurers’ Important Role in Curbing Rising Health Care Costs

Health care costs leapt from roughly 13 percent of GDP in 2000 to nearly 18 percent in 2015, and are expected to account for 20 percent of GDP by 2025 (Figure 1).1 Rising health care costs are being driven primarily by the increasing costs of specialty pharmaceuticals (see Putting Drug Prices Under a Credit Microscope), the rising rates of chronic illness and obesity and an aging population. As a result, health care inflation has outpaced general consumer price inflation (CPI) since the early 1980s, reducing the affordability of health care for many Americans (Figure 2). In our view, health insurers are uniquely positioned to drive down health care costs by providing a variety of tools to consumers and by incentivizing medical providers to focus more on value-based care than on the current payment model. Lower costs could impact market share and margins for investment-grade insurance issuers.

Increasing health care costs are one of the biggest credit issues facing investment-grade health insurers, which act as intermediaries between the patients receiving care and the providers of health care, such as doctors and hospitals. By acting as a third-party payer of health care services, health insurers are incentivized to reduce health care costs. Insurers have a wide array of tools to reduce costs both for members of health care plans and for providers.  

To begin with, insurers are increasingly offering telemedicine to reduce costs for members. Telemedicine is the remote diagnosis and treatment of patients via telephone or the internet. In addition, insurers are offering disease management programs and wellness programs, which have been found to be especially effective in reducing costs for patients with chronic conditions. This can have a strong impact, as chronic diseases account for 86 percent of national health care costs.2 For example, Aetna has created wellness resources for patients that include biometric screenings, smoking cessation and weight loss programs. UnitedHealth Group offers preventative care guidelines to individuals and families. These programs are designed to incentivize members to take an active role in their health before they are forced to do so by illness.

On the provider side, health insurers can help reduce costs through both financial and other means. Currently, providers in the U.S. are predominantly reimbursed through a “fee-for-service” model. In this model, providers are reimbursed for each service they provide to patients. More and more, insurers are shifting away from fee-for-service and toward a value-based model, in which providers are rewarded for the quality of care they deliver. Using a value-based model, insurers can cut low performing providers from their networks, thus incentivizing providers to both improve quality and keep costs down. Additionally, insurers can offer providers financial incentives, such as bonus payments based on quality medical outcomes or shared savings arrangements. Finally, insurers can leverage their technological and consulting capabilities to help providers more effectively manage costs.

An ESG Perspective

Access to health care is a particularly important social issue for the U.S. because it has a much higher rate of uninsured individuals than most other developed countries. The Affordable Care Act (ACA) has helped to lower the uninsured rate from 14 percent in 2013 to just under 9 percent in 2016, but that still outpaces a 0 percent uninsured rate in countries offering universal health care (such as the United Kingdom and Germany).

By helping to pare down health care costs, insurers can make meaningful contributions to health care access in the U.S., and can have a positive impact on the communities they serve. Environmental, social and governance (ESG) research/standards providers Sustainalytics, MSCI and the Sustainability Accounting Standards Board all include the commitment to access and affordability of health care as key metrics in evaluating the sustainability of health insurers. For example, commitment to access to health care gets a nearly 6 percent weight in the overall Sustainalytics’ ESG score for health insurers. Breckinridge’s ESG research incorporates analyses published by these providers.

This social benefit ties into Breckinridge’s ongoing ESG analysis of issuers. Through ESG analysis, we seek to look at more than profitability, factoring in nonfinancial factors that paint a broader picture of an issuer’s risks and opportunities (see Why ESG Integration Matters).

Key Takeaways

In general, the credit outlook for the large investment-grade Health Insurance sector is stable, in our view. The industry continues to benefit from significant barriers to entry, strong free cash flow generation and conservative balance sheets. Furthermore, premium growth has been robust, driven by employment trends, the growing U.S. population and the ACA. The largest health insurers are also well diversified across the various payer segments (group, Medicare, Medicaid, individual), and have expanded their offerings to provide more consulting and analytical services to the health care industry.

Overall, it’s our opinion that the insurers able to most effectively reduce health care costs will benefit not only through improved margins but also through expanded market share. This cost reduction can also substantially improve access to health care, which is an important societal benefit that we consider in ESG analysis.


[1] National Health Expenditure Fact Sheet, Accessed April 27, 2017.

[2] National Center for Chronic Disease Prevention and Health Promotion, Accessed April 27, 2017.


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