How The Individual Insurance Exchange Could Hurt Anthem's Earnings

Anthem Inc’s ANTM individual enrollment in the Health Insurance Exchange [HIX] is set to expand substantially, “even as the risk-pool is significantly disrupted by plan exits and as rate increases drive adverse selection,” JPMorgan’s Gary P Taylor said in a report. He downgraded the rating on the company from Overweight to Neutral, while reducing the price target from $154 to $132.

While expressing concern over Anthem’s earnings in 2017, analyst Taylor mentioned that continued yty HIX deterioration in Q3 had resulted in “incremental near-term caution (materially higher uninsured admissions in August/September also raise intra-year attrition concerns).”

Expanding HIX Footprint

A review of Anthem’s HIX offerings in California, Colorado, Connecticut, Kentucky and Nevada, which are among the company’s largest states, revealed “no 2017 exits in any of the 1,458 combinations of rate areas and metal-levels,” Taylor stated. These five states represent more than 50 percent of Anthem’s individual enrollment.

The company had 923k HIX members out of total individual enrollment of 1.7 million as of Q2 of 2016. Most of Anthem’s largest states are impacted by announced exits. The company’s projections imply a 10 percent margin contraction in 2016. “We believe that -10% margin will not improve despite rate increases in 2017 due to adverse selection; creating a plausible $1.00-1.50 yty EPS headwind,” the analyst wrote.

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