Health plans' earning gains tied to Medicare

The biggest insurers are finding government revenue is growing faster than private-payer revenue.

By Emily Berry — Posted Nov. 26, 2007

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As physician organizations fight a threatened Medicare reimbursement rate cut, health plans are awash in higher earnings fueled by their own Medicare collections.

Health plans such as WellPoint, UnitedHealth Group and Coventry reported that government-related earnings are more than making up for stagnant or slowing enrollment growth in the commercial sector.

For example, Humana's pretax, third-quarter 2007 earnings for its government unit -- which includes Medicare Advantage, Medicare Part D and Tricare -- were about eight times greater than the Louisville, Ky.-based company's pretax earnings from its commercial unit.

According to its quarterly filing with the Securities and Exchange Commission, Humana's Medicare Advantage revenues grew from $2.3 billion in the third quarter of 2006 to $2.8 billion in the third quarter of 2007. The company brought in another $890 million from its stand-alone Part D plan, up from $851 million a year earlier. Revenue from Medicare Advantage increased 19% to $2.8 billion, while commercial revenue was up only 2%, to $1.6 billion.

Overall, Humana reported net earnings of $1.78 per share, an 87.3% increase over the like period of 2006, on an 11.9% increase in revenue, the highest percentage increases of any large plan.

The American Medical Association and other physician organizations, as well as AARP, have fought to reduce Medicare Advantage payments -- which, as of 2006, were 112% of Medicare -- to pay for State Children's Health Insurance Program expansion and the reversal of physician reimbursement cuts.

On Oct. 29, the day Humana announced its profits, the AMA released a statement decrying how it earned them.

"Humana's blockbuster profits from its Medicare Advantage business should make taxpayers seriously question why the government is paying the insurance industry excess payments of $54 billion while planning steep cuts to physicians who are directly caring for seniors," AMA board member and Lexington, Ky., internist Ardis Hoven, MD, said.

A few days later, Medicare finalized the 2008 physician pay cut at an average of 10.1%, which physicians are urging Congress to reverse. They also are continuing to ask for a stop on extra reimbursement for Medicare Advantage.

Humana released a statement "respectfully disagreeing" with Dr. Hoven. "It is unfortunate that some members of the AMA want Congress to eliminate reimbursement to private insurers who provide needed and valued benefits for seniors, many of whom earn less than $20,000 a year," the statement said. "The debate should be focused on the value of benefits millions of beneficiaries receive through Medicare Advantage plans, not on singular instances of insurer involvement in the program."

Other publicly traded health plans reported gains for the third quarter of 2007, and generally cited Medicare Advantage and other government-plan growth as a main driver.

In a webcast outlining third-quarter earnings, Humana president and CEO Michael B. McCallister called Medicare the company's "best short-term growth opportunity," but said because of the aging population and the need to control costs in Medicare, managing care for seniors is also a good long-term business.

WellPoint president and CEO Angela Braly also pointed out to investors and analysts during a conference call that Medicare Advantage will "continue to grow."

Coventry's third-quarter earnings reflect how much more dependent even bigger plans are getting on government revenue.

At the end of last year, Medicare risk (including Medicare Advantage and Part D) made up 19% of the company's revenue. At the end of the third quarter of 2007, Medicare risk made up 29% of Coventry's revenue. Medicare revenue grew 11% since the second quarter of 2007, while commercial revenue grew about 6%.

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Growing larger

The nation's large, publicly traded health plans all reported profit growth in the third quarter of 2007,except Health Net, which took a $216 million charge to settle various lawsuits and regulatory issues. Except for earnings per share, all dollar figures are in millions.

Revenue Net income Earnings per share
Plan 3Q 2007 3Q 2006 Change 3Q 2007 3Q 2006 3Q 2007 3Q 2006 Change
Aetna $6,961.3 $6,299.5 10.5% $496.7 $476.4 $0.97 $0.84 15.5%
Cigna $4,413.0 $4,137.0 6.7% $365.0 $298.0 $1.28 $0.92 39.1%
Coventry Health Care $2,522.6 $1.909.1 32.1% $168.7 $147.5 $1.08 $0.92 17.4%
Health Net $3,631.9 $3,247.4 11.8% -$103.8 $90.9 -$0.93 $0.76 -222.4%
Humana $6,319.6 $5,649.8 11.9% $302.4 $159.2 $1.78 $0.95 87.4%
UnitedHealth Group $18,679.0 $17,970.0 3.9% $1,283.0 $1,112.0 $0.95 $0.80 18.8%
WellPoint $15,233.9 $14,449.4 5.4% $2,486.3 $2,293.8 $1.45 $1.29 12.4%

Source: Company filings with the Securities and Exchange Commission.

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