Private plans, public money: Insurers target federal funds

If you want to know why health plans are so interested in government business, check out where the growth is happening at UnitedHealth Group.

United's AmeriChoice Medicaid unit for the first nine months of 2007 saw a revenue increase of $508 million, or 19%, from the same period in 2006, to $3.2 billion of revenue. United Healthcare, which handles the bulk of the company's private-pay business, grew by $511 million on $26.8 billion of revenue, a 2% hike.

United is hardly the only plan seeing such growth. Big health plans are betting on a continued boost from government health programs to boost profits, offsetting slower growth in employer-sponsored health insurance.

"They're all under pressure to show growth, and the source of future growth is expected to be through government programs," said Richard Schnute, a health care consultant with HealthCare Options Inc., an Indianapolis firm.

For many plans, commercial business accounts for the vast majority of revenues and profits. But that growth is topping out, analysts say. After a flurry of deals the last 10 years that consolidated the commercial business by extending plans' geographic reach, insurers can't make any more big, revenue-juicing acquisitions without raising red flags with the Justice Dept.

Also, years of premium increases have driven some employer and individual customers to drop insurance altogether or make other changes in benefits, so premium hikes might not assure financial growth. And the U.S. economy itself can cause a hit. UnitedHealth Group, for example, has blamed a decline in profitability in its Uniprise unit, geared toward big businesses, on "employment attrition at continuing customers."

Administering government plans, including Medicare Advantage, Medicare Part D, Tricare and Medicaid, is seen by plans as a small but fast-growing revenue source. The growing number of baby boomers moving into Medicare age is one oft-cited reason.

Another is plans' ability to make acquisitions in government-related niches. United's Medicaid business, for example, continues to grow quickly thanks to deals such as its purchase of Pittsburgh-based Unison Health Plans, which administered health plans for 370,000 Medicaid recipients, and reported $1 billion of revenue in 2007. That membership increase more than makes up for the 315,000 commercial members United lost in 2007.

Sue Peters, president of government health plans for Aetna, spoke for her company, but her statement is echoed throughout the health insurance industry: "We see very strong potential in continuing to serve the commercial segment as we have in the past. But as we look from a macroeconomic point of view, we know the government sector is growing at a faster rate than commercial or employer-based heath care."

The reliance some plans now have on government health programs has coincided with a market for employer-sponsored health insurance that is growing more slowly.

Health plans can't make the scale of acquisitions such as the multibillion-dollar Anthem-WellPoint or United-PacifiCare deals, analysts say, because now plans would have to buy competitors in existing markets in order to grow. The Justice Dept. had let most deals through because the insurer tended to buy into a new market.

And even if they could, analysts say, trends are for fewer employers to offer insurance.

"Every year you see a new study from a consulting firm that shows the number of employer groups offering benefits drops," said Jane DuBose, associate director of health plan analysis for HealthLeaders-Interstudy, a Nashville, Tenn.-based health care market research firm.

Among the recent reports reflecting a decline in employer-sponsored health insurance:

• A November 2007 report from the Economic Policy Institute, a Washington, D.C.-based nonpartisan nonprofit group advocating a "prosperous and fair economy," noted that in 2000, 74.8% of workers had employer-provided coverage, whereas 70.8% of workers had coverage in 2006.
• A December 2007 issue brief from the Employee Benefit Research Institute reported that the expansion of benefits in the late 1990s and early 2000s has given way to a rate of health insurance benefits in 2007 closer to what it was in 1996.

While the market for big employer accounts is saturated, small businesses are dropping health insurance, opening up a market for individual insurance policies, said Lawton Burns, PhD, director of the Wharton Center for Health Management and Economics at the University of Pennsylvania Wharton School of Business.

Some plans also are finding corporate customers, wishing to gain more control over health costs, migrating to taking on their own risk and using insurers as administrators only, which is a less-lucrative business for insurers.

For example, United stated in its third-quarter earnings report that its commercial membership stayed almost the same, falling 15,000 to about 14.5 million as of Sept. 30, 2007. But there was reshuffling in how those members used United. The number of commercial risk members fell by 225,000, to about 9.6 million. But the number of administrative-only members went up by 210,000, to about 4.9 million.

WellPoint, in its third-quarter earnings report, said commercial and consumer business profit for the first nine months of 2007 went up 4%, to $1.2 billion, on $31.5 billion of revenue. But that increase was lessened by premium hikes being "partially offset" by "a shift in the mix of business from fully insured to self funded."

WellPoint also reported its commercial and consumer membership went up only 1%, to slightly more than 30 million, that number being dragged down by "slight membership declines in local group and national accounts."

Government growth

Some companies have long recognized that handling government plans offered a vehicle for growth. For Louisville, Ky.-based Humana, revenue from government business surpassed commercial business. In the third quarter of 2007, the company brought in $4.6 billion from Medicare, Medicaid and Tricare business, and just $1.7 billion from employer-sponsored and individual health insurance plans.

But others are catching up. United bought PacifiCare in 2005 not only to move into California, but also because of that company's strong presence selling Medicare-sponsored plans. Aetna went from almost nothing in Medicaid to 747,000 members as of Sept. 30, 2007, thanks to 575,000 members acquired through the 2007 purchase of Phoenix-based Schaller Anderson. Many plans in 2007 reported revenue gains of 10% or more on their government business.

And with estimates showing the government health care sector, worth about $800 billion, projected to grow to $1.5 trillion in the next decade, the growth opportunities aren't expected to slow.

"There aren't many markets you can say that about," UnitedHealth Group vice president Simon Stevens said at the health plan's December 2007 investor conference.

In a November 2007 interview, Aetna President Mark Bertolini said: "The government funding of health care is going to only increase."

Mike McCallister, Humana's CEO and president, said in an Oct. 29, 2007, conference call with analysts that he expects a 20% increase in Medicare Advantage membership in 2008.

"Given the aging of baby boomers, Medicare continues to show that it is the best near-term opportunity for significant growth in the industry," he said. "Medicare, however, is not just a near-term growth opportunity. It will be a growth opportunity for many years to come."

The doctors' view

Payment for doctors hasn't been rising in turn, however. An American Medical Association survey released in May 2007 found more than half of physicians reported payments by Medicare Advantage plans lower than what they would receive from traditional Medicare.

The AMA has taken issue with the fact that health plans are paid more on average for services under Medicare Advantage than physicians are reimbursed under traditional Medicare. (The figure for 2006 was 112% of Medicare.)

Congressional Democrats proposed rolling back those payments to fund a stabilization of physician reimbursement rates, but that measure failed.

Aggressive marketing and health plan profits from Medicare Advantage plans in particular have also drawn criticism from organized medicine and from members of Congress. Many plans have been suspended for what was seen as deceptive and overaggressive sales of such plans.

Analysts say doctors shouldn't expect insurers to increase reimbursement for government plans they manage. Most plans point out in their financial documents that their government medical-loss ratio -- the amount of money spent on care compared with the amount of premiums collected -- is about five to seven points higher than their private-pay ratio.

For many plans, that means a medical-loss ratio at about 85% for government plans, a figure insurers are trying to reduce.

Even if a new administration were to tweak the way Medicare Advantage is reimbursed, the simple fact of the aging population will likely keep health plans profitable, said Rexford Santerre, PhD, professor of finance and health care management at the University of Connecticut Center for Healthcare and Insurance Studies. "With the baby boomers joining the elderly population, the elderly are in need of health care -- most definitely they'll be able to make profits."