Compliance with a key provision of the new health reform law could cost the nation's health insurers far more than most analysts expected, says a new study by Weiss Ratings, a Jupiter, Fla.-based provider of independent insurance company ratings.

Weiss found that companies already complying in 2009 had average net profit margins of only 0.7 percent, while those not yet complying had average net margins of 6.3 percent, or nine times more.

Martin D. Weiss, president of Weiss Ratings, says, "As long as their investment incomes hold up, most large insurers should be able to handle the increased medical expenses expected under the new health care reform. If investment income declines significantly, however, few insurers will be able to comply without debilitating impacts to their bottom line, and ultimately, their financial stability as well."

Starting next year, the Patient's Bill of Rights will require individual and small group insurers to spend at least 80 percent—and large group insurers to spend at least 85 percent—of their premium dollars on medical care and on efforts to improve the quality of care. Other provisions of the law, including requirements to cover certain groups with pre-existing conditions, also are expected to drive medical expenses higher, the company says.

To gauge the impact of the reform on the industry's earnings, the Weiss study covered 543 health insurers. They included 226 "not-yet-compliant" companies, meaning those that spent less than 85 percent of their premiums on medical expenses last year, and 317 "already-compliant" companies, meaning those that spent 85 percent.

Weiss said it found the following:

•Including income from both their insurance underwriting operations and from their investments, the "already-compliant" companies earned a total of $1.74 billion, or an average of $5.5 million each. In contrast, the "not-yet-compliant" companies earned far more, $7.68 billion, or an average of $34 million each.

Underwriting income, the difference between premiums collected and medical claims paid, is naturally the income category primarily responsible for the sharp differences. Thus, as a group, the "already-compliant" companies lost $372 million on their insurance operations, with an average underwriting margin of a negative 0.2 percent. Meanwhile, the "not-yet-compliant" companies earned $6.11 billion with an average underwriting margin of 5 percent.

*The overall size of the insurer also was a factor because larger companies tend to have more investment income, making it possible for them to afford higher medical expenses per premium dollar. However, the contrast between the two groups was still great despite size differences:

Among smaller health insurers, meaning those with less than $1 billion in assets, "already-compliant" companies had an average net profit margin of only 0.6 percent; while "not-yet-compliant" companies boasted an average of 4.5 percent, or 7.5 times more.

Meanwhile, among larger health insurers, meaning those with $1 billion or more in assets, the "already-compliant" group had a net profit margin of 0.9 percent, and the "not yet compliant" enjoyed an average net margin of 9.9 percent, or 11 times more.

Weiss says, "Although the health-care reform bill is expected to deliver significant benefits to consumers, Congress and state insurance commissioners should keep a watchful eye on the overall financial health of the industry, while consumers should be especially careful to do business with companies that have the wherewithal to promptly pay claims despite increased costs."

Weiss Ratings accepts no payments for its ratings from rated institutions. It claims to be among the nation's leading providers of independent ratings on 8,000 U.S. banks and savings-and-loans and the only provider of independent ratings on the nation's 4,200 insurance companies.