Analysts focus on insurers' health outlays

Despite rising profits, Wall Street is pressuring health plans to do something about rising medical-loss ratios.

By Emily Berry — Posted Feb. 25, 2008

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All but one of the country's biggest publicly traded health plans reported that their profits grew by more than 10% in 2007.

But in calls with executives reporting fourth-quarter results, financial analysts focused on plans' rising percentage of how much of each dollar is spent on health care.

While insurers offer no specific ideas of how they will reduce what is commonly called their medical-loss ratio, the pressure from Wall Street raises the specter of higher premiums for patients, reduced reimbursement for physicians, or both.

Medical-loss ratio is of interest to Wall Street because analysts use it "to determine what the long-term future of a firm is likely to be," said Doug Sherlock, a Gwynedd, Pa.-based health plan consultant. The number is critical to long-range performance because plans typically negotiate premiums once a year, and if costs rise sharply, it's impossible to immediately react by repricing contracts with government and employers.

The two largest private-pay plans, WellPoint and UnitedHealth Group, came under particular scrutiny.

WellPoint's fourth-quarter earnings, up 7.2%, fell short of analysts' expectations, especially since the Indianapolis-based company's increase came in part because of $1.8 billion in stock buybacks. The company reported a fourth-quarter medical-loss ratio of 82.9%, up nearly two points from the end of the third quarter. The news caused its stock to drop nearly 9% in the first two days after its Jan. 23 earnings release.

WellPoint CEO Angela Braly and Chief Financial Officer Wayne DeVeydt told investors that higher-than-anticipated costs in its quickly growing Specialty, Senior, and State-Sponsored segment, which includes Medicare Advantage, Part D and Medicaid managed care, had pushed up the company's medical-loss ratio from 80.2% at the end of 2006 to 82.4% at the end of 2007.

"I think it's true to say that medical trend was slightly higher than we had expected," DeVeydt said. But he tried to assure analysts that the company's estimated earnings for 2008 were still on target, and that the medical-loss ratio would be reduced to 81.6%. DeVeydt said "even if" the company found it was charging premiums too low to cover medical costs, about 30% of its contracts could be repriced within 60 days.

Medicaid programs in Ohio and Connecticut were partly to blame, DeVeydt and Braly said. High costs prompted the company to withdraw from most of its Ohio Medicaid business and convert its Connecticut Medicaid contract to an administrative-only arrangement.

Government business is increasing WellPoint's medical-loss ratio, but, as with most other insurers, it also is increasingly a driver of revenue growth. Revenue from the government segment of WellPoint's business grew by 18.7% in 2007. Its commercial business segment still brought in more than three times the revenue of the Specialty, Senior and State-Sponsored segment -- $42.1 billion to $13.7 billion. But commercial revenue grew 3.7%year over year.

Minnetonka, Minn.-based United, meanwhile, reported earnings growth of 3.5% for the fourth quarter of 2007. The company also reported a medical-loss ratio of 83.7% for the fourth quarter of 2007, up from 81.6% in the third quarter. United told analysts the increase was due to a one-time, state regulatory issue but did not elaborate.

Not every health plan reported medical-loss ratio increases in 2007 or in the last quarter of the year, but executives at every company fielded questions about medical costs as they spoke with investors about their most recent profit postings.

California-based Health Net also left Connecticut's Medicaid program and expects an improvement in its medical-loss ratio in 2008 thanks to that decision, executives said.

Cigna saw medical cost increases in the experience-rated segment of its business, but CFO Mike Bell said that shouldn't make investors concerned about the current year.

"We do not see medical costs up-ticking at this point for full year 2008 versus what we expected before," he said. "In terms of the fundamentals of medical costs trend, there's no change in our outlook for 2008."

Louisville, Ky.-based Humana posted 2007 profits dramatically above the prior year; its earnings per share of $4.91 was 69.3% better than the $2.90 it reported in 2006.

Coventry Health Care saw its medical-loss ratio drop from 79.6% in 2006 to 79.3% in 2007. But during a conference call with analysts, CFO Shawn Guertin said cost trends are "something we're watching very closely."

The company's loss ratio was slightly higher than expected, CEO Dale Wolf said, in part because of the company's higher-than-anticipated Medicare Part D membership.

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In the money

The seven largest health plans in the U.S. recently reported their earnings for 2007. Revenue was up for every company compared to 2006. California-based Health Net was the only one of the big insurers to post a drop in earnings from 2006 to 2007, due to paying three large settlements in class-action lawsuits. Revenue and income totals are in millions.

Revenue Net income Earnings per share
Plan 2006 2007 2006 2007 2006 2007
Aetna $25,145.7 $27,599.6 (+9.8%) $1,701.7 $1,831.0 $2.99 $3.47 (+16.1%)
Cigna $16,547.0 $17,623.0 (+6.5%) $1,014.0 $1,110.0 $3.43 $3.87 (+12.8%)
Coventry $7,733.8 $9,879.5 (+27.7%) $560.0 $626.1 $3.47 $3.98 (+14.7%)
Health Net $12,908.4 $14,108.3 (+9.3%) $329.3 $200.2 $2.78 $1.76 (-36.7%)
Humana $21,416.5 $25,290.0 (+18.1%) $487.4 $833.7 $2.90 $4.91 (+69.3%)
Health Group
$71,542.0 $75,431.0 (+5.4%) $4,159.0 $4,654.0 $2.97 $3.42 (+15.2%)
WellPoint $57,038.8 $61,134.3 (+7.2%) $3,094.9 $3,345.4 $4.82 $5.56 (+15.4%)

Source: Company filings with the Securities and Exchange Commission

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