Managed care profits up, optimism for 2005 strong

But doctors say plans, despite their bounty, are still squeezing them by suppressing reimbursements and squeezing patients by rapidly raising premiums.

By — Posted Feb. 28, 2005

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To Douglas K. Holmes, MD, hearing that most of the biggest managed care plans posted hefty profit increases last year is something like watching the old TV show "Lifestyles of the Rich and Famous" -- a story of wealth, success and goals achieved that appears to have little to do with his own daily life.

"Despite the wonderful profits they've made, they are still very hard-line when we're trying to negotiate a contract with them," said the Raleigh, N.C., otolaryngologist, who in contract negotiations three months ago was offered reimbursement increases of no more than 5%. "There is no transference of any of their [additional profits] to doctors' rates."

This is an old story to Dr. Holmes, but the profit levels of most large insurers are surging with an exuberance that's catching the attention of Wall Street anew. Six of the seven largest health plans saw their profits increase in 2004 -- California-based Health Net was the only one to see a decline. Aetna and CIGNA saw their profits more than double. Aetna's were up 136% and CIGNA's were up 128%.

Managed care "had a great year," said Carl Mercurio, president of Corporate Research Group, a New Rochelle, N.Y.-based consulting firm that studies the industry. "Profit was way up, they were able to increase [premiums], they kept medical costs in line, and they've enjoyed some efficiencies in administration."

HMO premiums increased by about 10% to 12% last year on average, about two to three times the rate of inflation, Mercurio said. At the same time, medical cost increases fell from 7.8% to 6.4% last year, said Isabelle Roman-Barrio, a senior financial analyst at New Jersey-based A.M. Best Co.

"There's a lot of talk of medical care and technology and pharmaceuticals rising in cost, so that managed care companies feel justified in raising their rates," Dr. Holmes said. "But rates are far exceeding the [pace at which] the costs are going up."

Donald J. Palmisano, MD, immediate past president of the AMA, said he views high profits in managed care as an outgrowth of consolidation among health plans over the past few years.

"There has been an undeniable decline in competition in health insurance markets," he said. "In fact, profit margins for health insurers have remained historically high for the past four years while the total number of health insurers in the country has declined."

The federal government should assess the level of competition in health care and, by using its subpoena power to get proprietary pricing data from insurers, determine if it's proper for managed care plans to continue hiking premiums while making record profits, Dr. Palmisano said.

One poll says many managed care executives say they're feeling pretty good about the prospects for a prosperous 2005, too.

The majority of managed care companies appear optimistic that business will remain good this year, at least in terms of attracting higher revenues, according to a study by Celerant Consulting, a Lexington, Mass.-based affiliate of Novell Inc.

Celerant's survey of 30 managed care executives found six out of 10 expect growth in revenues in 2005. This is the second-highest level of optimism for any industry polled by Celerant, trailing only the telecommunications field.

"Overall, if you look at Wall Street, it's cautiously optimistic about improvements in industry [performance]," Celerant vice president Rob Haarsgaard said about managed care. "A lot of the companies have bullish [attitudes] toward 2005."

Just 7% of managed care leaders said their revenues would probably be down this year, according to the Celerant report.

In addition to a slowdown in the increase of pharmaceutical spending that's taken place as use of generics has risen, Haarsgaard said, the upward trajectory of health costs that's traditionally challenged managed care is moderating as patients learn more about the cost of their care.

"There is a greater education and awareness of the customer base [about prices]," he said.

Wendell Potter, a spokesman for Philadelphia-based CIGNA, said his company more than doubled its earnings through a standard turnaround strategy that included raising many members' premiums and identifying and dropping the lines of business that are least profitable -- a move that has trimmed its member rolls by roughly 10% since the end of 2003.

"You have to be able to stay in business, to price your business profitably," he said. "You can't continue to lose money."

CIGNA also cut about 3,000 positions last year, about half through firings and half through attrition, he said.

Potter rejected the idea that the profit levels attained by plans should be viewed by physicians as money extracted from the health care system, or from physicians' incomes. He gave disease management programs as an example of initiatives that companies such as CIGNA are building up and which require funding. These will assist both patients and physicians by increasing the quality and efficiency of care in the long run, he said.

But Michael Wasylik, MD, an orthopedic surgeon in Tampa, Fla., and chair of the managed care committee of the Florida Medical Assn., said such programs may just add to doctors' burdens if the brighter profits never are translated into higher payments to physicians as well.

"They expect the doctors to do more, which is OK," Dr. Wasylik said. "Doctors want to do more. But we don't have the staff to do that if we can't hire employees. [Insurers] absolutely won't acknowledge the fact that we need adequate reimbursements. They're making double the profits. Can't they give doctors just a little of that? The public sees managed care as making a lot of money and they think it's going to the physician, and it's not."

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Profiting greatly

How major managed care companies' finances have grown since 2003.

(in billions)
(in millions)
Per-share earnings
2004 2003 2004 2003 Increase 2004 2003
Aetna $19.2 $18.0 $2,200 $933 136% $14.30 $5.91
CIGNA $18.2 $18.8 $1,440 $632 128% $10.40 $4.50
United Health Group $37.2 $28.8 $2,590 $1,830 41.5% $3.94 $2.96
PacifiCare $12.3 $11.0 $303.0 $243 24.7% $3.20 $2.89
WellPoint $20.8 $16.7 $960 $774 24.0% $6.10 $5.45
Humana $12.2 $13.1 $280 $229 22.3% $1.72 $1.41
Health Net $11.1 $11.6 $42.6 $234 (81.8%) $0.38 $1.98

Source: Company financial reports filed with the Securities and Exchange Commission

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