Health reform on investors' minds as insurers report earnings

Health plans and their investors face a future less certain than at any time in recent memory, so talks with analysts in October about quarterly earnings focused less on the three months prior and more on the months and years ahead.

The companies had another good reason to focus on the future -- while increased profits please investors, politicians have been quick to criticize the industry for making too much money while raising rates and rejecting applicants for insurance.

Industry analyst Sheryl Skolnick, PhD, with New York-based Pali Capital, pointed out the dilemma in her blog entry for Oct. 23.

"We wonder whether better-than-expected earnings for 3Q09 might be a political embarrassment of riches and whether that performance might lead to more support for tighter regulation of the commercial insurance markets," she wrote.

The quarter brought rising profits, compared with the same period in 2008, for some of the largest health plans: Aetna, Cigna, Humana and UnitedHealth Group.

Revenue was up for six of the seven largest shareholder-owned health plans. The exception was Cigna. But the company credited operating efficiencies and cost-cutting for its 92% increase in per-share earnings, compared with the third quarter of last year.

Cigna was one of four companies that reported increased profits. WellPoint's profits fell 4%, while Coventry Health Care dropped 17%. Health Net reported a gain of 17 cents per share in the third quarter of 2008 but a 64-cent loss for the same period of 2009. However, that loss was attributable mostly to charges related to the sale of business in the Northeast. Otherwise, Health Net's third-quarter profits would have more than doubled to 40 cents per share.

The increases in revenue and profit put some companies in the crosshairs of the health system reform debate. Humana in particular was a target after reporting per-share earnings 63% higher than the third quarter of 2008, mostly on the strength of government business such as Medicare Advantage.

"It's no wonder why Humana has been misleading seniors about health insurance reform," Jim Manley, a spokesman for Senate Majority Leader Harry Reid, (D, Nev.), told reporters. "They saw their profits rise [63%] last quarter and want to make sure the gravy train doesn't end."

Democrats called for an investigation of Humana earlier this year after the company sent mailers to some of its Medicare Advantage subscribers warning of possible cuts to the program as part of proposed health system reform bills.

Humana responded that its profit growth was mostly due to measuring against a third quarter of 2008 that was affected by one-time charges for write-downs of distressed assets and securities, and that its after-tax income margin was only 2.2% for the third quarter of 2009.

Humana, which has a higher proportion of government programs than commercial membership compared with its competitors, was able to offset commercial membership losses with gains in Medicare and Medicaid in the last quarter.

The same was true to varying degrees at Aetna, UnitedHealth Group and WellPoint. Aetna, for example, added 40,000 new Medicaid members during the quarter, and United reported it has added 460,000 Medicaid members during the first nine months of the year.

Even at companies that benefited from growth in government plans, executives tried to temper investor expectations for the next year and beyond for both government and commercial business.

At Aetna, earnings for the quarter were up 26% from the same period in 2008, but higher-than-anticipated medical expenses have cut into overall 2009 earnings. The company's medical-loss ratio, the portion of each dollar it spends on health care, rose from 80.9% in the third quarter of 2008 to 85.6% during the same period this year. Revenue at Aetna was up 14% for the quarter compared with last year, thanks in large part to the company's investments rather than operating activities.

Aetna executives said they would be raising prices in some cases "ahead of trend" to ensure that the same thing doesn't happen in 2010. In the short term, higher premiums will cost membership and could drive down profits, they said.

Next year will be a "repositioning year, a year that does not fully reflect the earnings potential of our business," said Aetna Chair and Chief Executive Officer Ronald Williams.

Coventry Health Care saw a 17% drop in profits for the quarter compared with the third quarter of 2008, but better-than-expected results for Medicare and Medicaid business. Coventry Chief Executive Officer Allen Wise was particularly candid about the future for the company and its peers, at least in the near term. He acknowledged that profits from Medicare Advantage and Medicaid business that helped them in the last quarter could be diminished by reform legislation.

"We understand that there are headwinds for next year, headwinds on the revenue side from the government programs, both Medicare Advantage and Medicaid," he said. "We understand that our industry has kind of priced ourselves out of business on the commercial side. The pressure on membership on the commercial side is because people can't afford the coverage any longer."

Debra Donahue, vice president for market analytics for Mark Farrah Associates, a research firm based in Kennebunk, Maine, said plans are right to be subdued. She said she didn't see evidence of the companies dramatically downplaying third-quarter successes, since the outlook is nothing to be jubilant about.

"Nobody is in a position to hide the fact that they're doing better," she said. "I think everybody's being appropriately conservative."