Analysts focus on health plans' medical cost numbers

While most insurers' earnings are up and percentage of health spending down, investors worry about trends that could send both in the reverse direction.

By Emily Berry — Posted May 18, 2009

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Health plans that already have been watching commercial membership rolls decline are looking to the next several months to find out whether their remaining members prove to be more expensive to cover.

In parsing the first-quarter 2009 financial results, released in April and May, for the country's largest private payers, investment analysts gave hardly a nod to rising profits most plans saw in the first quarter. Instead, they were focused on the potential for the companies' medical spending to rise as more Americans lose their jobs and become uninsured.

Analysts are concerned that the very ill who cannot do without insurance will be disproportionately represented in health plans' membership, as healthier unemployed people go without coverage. That scenario likely would drive up the companies' medical-cost ratios, the industry measure for the amount of every premium dollar spent on care.

Executives at a few plans shared those concerns after reviewing 2009 first-quarter earnings.

"I think when you lose 5% or 10% of your risk membership, you worry a little bit about what that brings with it," Coventry Health Care Chief Financial Officer Shawn Guertin said. "I worry a little bit just because I don't know what the uptake is going to be on this new COBRA subsidy. I think those are things that could potentially create cost pressure."

Coventry's revenue rose to $3.6 billion in the first quarter of 2009, but profits were down from the same period last year. Its earnings per share also were down compared with a year ago. However, it was alone among the seven largest publicly traded plans in seeing a decline in per-share earnings. Others saw a drop in net income, but per-share earnings were boosted by company stock repurchases.

The reaction by analysts to Aetna's numbers show how they reacted more to longer-term cost trends than the quarterly results.

Aetna's higher-than-expected medical-cost ratio -- 83% of every premium dollar spent on care -- managed to overshadow a rise in profit for the quarter, sending its stock downward after earnings were released. Aetna's revenue, its earnings and its earnings per share for the first quarter of 2009 were up compared with the previous first quarter.

The company also raised its projected commercial medical-cost ratio for the entire year from a range of 80.2% to 80.8% up to 81% to 81.6%.

Chair and Chief Executive Officer Ron Williams said the company was hit during the first quarter by both unemployed workers' adoption of COBRA benefits and nervous-but-still-employed workers getting care while they still have coverage.

COBRA concerns

COBRA, the federal Consolidated Omnibus Budget Reconciliation Act, allows workers to keep the same plan they had at work if they leave their job, but also sticks them with 100% of the premium.

Federal help for workers who opt into COBRA health benefits after losing their jobs complicates enrollment projections, health plan executives said. As part of the federal stimulus package passed in February, jobless workers who opt into COBRA benefit continuation could receive a 65% reduction in their premium.

WellPoint President and CEO Angela Braly told analysts during her company's conference call that WellPoint wasn't expecting much of an impact from COBRA.

WellPoint saw a drop in revenue and net earnings in the first quarter of 2009 over the same period last year. But thanks to company stock repurchases, WellPoint's earnings per share were up 8% from a year ago.

The broader economic downturn has hit WellPoint's membership, Executive Vice President and Chief Financial Officer Wayne DeVeydt said. In addition to job cuts, small and large businesses are rolling back benefits, but so far individual insurance business has been unaffected, he said.

The recession may make what insurers call "adverse selection" even worse, said Richard Cooper, MD, professor of medicine at the University of Pennsylvania and a professor at the university's Leonard Davis Institute of Health Economics.

"Whereas COBRA would have attracted maybe most people, now it's going to be skewed toward people who really feel they've got to have COBRA," he said.

It's also possible medical costs won't spike as a result of this recession until a few years down the road.

Dr. Cooper said the research that might indicate how people would act in terms of their health during a recession suggests that when people delay care because they can't afford it, their health suffers and they (and their health insurer) pay more later.

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Insurers wait for recession shoe to drop

The first quarter of 2009 brought better-than-expected profits for a few of the largest publicly traded health insurance companies. Declining commercial enrollment, job losses and federal subsidies for COBRA coverage could drive up spending on medical claims. Except for earnings per share, all dollar figures are in millions.

Revenue Net income Earnings per share
Plan 1Q08 1Q09 1Q08 1Q09 1Q08 1Q09
Aetna $7,797 $8,620 (11%) $432 $438 $0.85 $0.95 (12%)
Cigna $4,569 $4,773 (4%) $58 $208 $0.20 $0.76 (380%)
Coventry Health Care $2,941 $3,574 (22%) $125 $44 $0.81 $0.30 (-63%)
Health Net $3,837 $3,933 (3%) -$36 $22 -$0.33 $0.21 (164%)
Humana $6,960 $7,712 (11%) $80 $206 $0.47 $1.22 (160%)
WellPoint $15,554 $15,143 (-3%) $588 $580 $1.07 $1.16 (8%)
UnitedHealth Group $20,304 $22,004 (8%) $994 $984 $0.78 $0.81 (4%)

Note: Coventry reports operating revenue only. Other firms' figures are total revenue, including investment gains and other income sources.

Source: Company filings with the Securities and Exchange Commission

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