Health plans profit despite recession

Many of the largest health insurers relied on Medicaid and Medicare to deliver earnings, offsetting losses of membership in commercial, employer-sponsored business.

By Emily Berry — Posted Feb. 22, 2010

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Most of the country's largest health insurance companies managed to hand investors a profit in 2009, but not without some reorganization, cost-cutting and unexpected growth in some business lines that they might not be able to rely on long term.

Few of the seven largest companies reported fourth-quarter and full-year earnings for 2009 without a literal or figurative asterisk pointing to one-time gains or losses taken in an effort to streamline their companies.

Nearly all of the seven largest stockholder-owned health plans saw a decline in commercial membership -- their highest-profit business -- due to attrition in employer-sponsored plans, thanks to layoffs that came with the recession. In their financial reports, the companies addressed those losses.

Health Net, the only company among the seven largest to post a loss for the quarter and the year, took a $137.3 million charge against earnings from the sale of its business in Connecticut, New York and New Jersey. UnitedHealth Group bought renewal rights to that membership in a deal that closed in December 2009. Health Net reported that it gained $350 million in cash as part of the deal, with more to come depending on how many members end up renewing with United.

Health Net President and Chief Executive Officer Jay Gellert said the company has pared itself down to a more profitable core, based in its home state of California, as well as Oregon and Arizona.

"Health Net today is a western health plan company with a solid government business that is international in scope," he said in a quarterly earnings conference call with investors. "Our structure is now simple and clear. We're focused on our strongest areas."

Excluding the charges related to the Northeast sale and other reorganization efforts, the company saw a rise in profits to about $235.1 million on revenue of $15.7 billion, up from $199.1 million in profits on revenue of $15.4 billion in 2008. Absent the sale of the Northeast business and other charges, its per-share earnings were $2.25 for the year compared with 88 cents per share in 2008.

Profits elsewhere

WellPoint's profits for the year were up to $4.7 billion on revenue of $19 billion from $2.5 billion in profit on $15 billion in revenue for 2008. About $2.7 billion of the 2009 profit came in the fourth quarter with the sale of NextRx, its mail-order pharmacy subsidiary. The $4.7 billion deal with Express Scripts closed Dec. 1, 2009.

WellPoint's per-share earnings jumped 107.6%, from $4.76 in 2008 to $9.88 for 2009. The NextRx sale was responsible for $3.79 per share worth of profits -- without it, WellPoint would have earned $6.09 per share in 2009.

Investment income also helped insurers avoid losses or diminishing profits. UnitedHealth Group, for example, made $11 million in investment income in 2009, compared with an investment loss of $6 million in 2008.

Insurers also repurchased stock in 2009, boosting per-share earnings even in cases when income didn't rise as dramatically. For example, Aetna bought back 28.9 million shares over the course of 2009. That kept per-share earnings up a penny from 2008 at $2.84 per share even though net cash earnings were down almost 8%, to $1.3 billion from $1.4 billion in 2008.

Revenue was actually up for Aetna, at $34.8 billion for 2009 compared with $30.9 billion in 2008, but high medical costs kept profits from reflecting that increase. Aetna, like many plans, said unexpected costs related to A(H1N1) and extension of COBRA benefits for the recently unemployed dragged down profits.

Other companies relied heavily on growth in Medicare and Medicaid membership -- the latter growing as a result of the economic recession -- to offset the decline in its core commercial business.

In an exchange with investment analyst Carl McDonald,of Oppenheimer & Co. during Health Net's earnings conference call, Gellert said the company was counting on growth whichever direction the economy takes.

"We're basically depending on the economy, either expecting some Medicaid improvement or some commercial improvement, and that covers us either way," he said. If the economy gets worse, "we'll get more Medi-Cal [California's Medicaid program]; if it gets better, we'll get more commercial."

Health reform effect

But profits that companies such as Health Net and Humana are leaning on now could dry up before long if state budgets get any leaner or federal health system reform shrinks payments to Medicare managed care companies, experts said.

"In the longer term, there is some risk on putting too much weight on public programs because Medicaid and Medicare -- especially Medicare -- have long-term solvency issues," said Thomas Buchmueller, PhD, professor of business economics and public policy at the University of Michigan's Stephen M. Ross School of Business.

"Policymakers are going to look for ways to control spending," Buchmueller said. "Cutting pay to private health insurance plans is one lever, and one area this administration and Democrats have been more open to than the Bush administration."

Some of the largest health plans pared down administrative costs in 2009, either because their Medicare and Medicaid business wasn't strong enough to drive profits alone, or because the companies needed both things to overcome the economic drag on profits.

Aetna, Cigna, WellPoint and United were among the plans that cut a significant portion of their work force in 2009.

Cutting overhead makes sense in the short term, but there is a limit to how much these companies can scale back without compromising service, Buchmueller said. Whether that ends up hurting the companies remains to be seen.

"There are probably trade-offs in terms of customer service and relations with providers," he said. "The other long-term trend in the health insurance industry is toward consolidation. So ultimately it may be consumers who are the ones who bear the brunt. Maybe 15 years ago if you got bad service from your HMO, you could switch to another one in the market. Now people have fewer options."

Investment options

Investors, however, still have plenty of choices, and whether they continue to put their money into health insurance companies will depend in part on whether federal health system reform stalls or moves forward, experts said. During 2009 negotiations, stock prices for the major health plans tended to rise whenever Congress appeared unlikely to move forward, and dropped when major health system reform legislation passed.

Why that trend persisted is a bit of a mystery, Buchmueller said, because a health insurance mandate was a consistent element of reform proposals.

"If I was in a market and the government said people had to buy my product, I would think that would be a good thing," he said. "The status quo means they are less likely to be subject to new federal regulations, but what we saw after demise of the Clinton plan was different states try to fill the void, so we might see a lot of new state regulations, things that may impose costs on the plans, so there could be a bit of, 'Be careful what you wish for.' "

Though insurance company executives were, almost without exception, cautious about projected earnings for 2010, Goldman Sachs investment analyst Matthew Borsch saw 2009 results as a sign of the end of the industry's down cycle.

"We expect commercial margins and enrollment to stabilize and gradually expand from here," he wrote in research notes to investors. "While we still expect a drag from Medicare Advantage reimbursement, our forecast is now less negative given the likely more incremental and moderate approach to health care policy/reform."

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Squeezing out profits

Quarterly profits for the nation's largest publicly traded health plans were a mixed bag for the last quarter of 2009. Some of the companies benefited from one-time transactions -- in WellPoint's case, the sale of its mail-order pharmacy subsidiary. Others, like Health Net, which sold off part of its membership at the end of 2009, were hurt by one-time charges. Dollars are in millions.

Revenue Net income Earnings per share
Plan 2008 2009 2008 2009 2008 2009
Aetna $7,759.3 $8,756.2
$194.7 $165.9 $0.42 $0.38
Cigna $4,817.0 $4,636.0
-$209.0 $330.0 -$0.77 $1.19
Coventry $2,976.7 $3,428.1
$88.2 $109.1 $0.60 $0.74
Health Net $3,869.5 $3,798.1
$35.5 -$45.2 $0.34 -$0.43
Humana $7,487.6 $7,633.0
$174.1 $250.7 $1.03 $1.48
UnitedHealth Group $20,454.0 $21,784.0
$726.0 $944.0 $0.60 $0.81
WellPoint $15,069.6 $19,046.5
$331.4 $2,741.8 $0.65 $5.95

Note: Coventry reports operating revenues, which excludes investment income or losses.

Source: Company filings with the Securities and Exchange Commission

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Cutting costs to make money

In 2009, health plan profits came as a result of lower expenses, greater investment income and greater premium revenue per member. Plans lost commercial members as companies laid off employees, though some plans made up for those numbers with Medicare and Medicaid business. Dollars are in millions.

Revenue Net income Earnings per share
Plan 2008 2009 2008 2009 2008 2009
Aetna $30,950.7 $34,764.1
$1,384.1 $1,276.5 $2.83 $2.84
Cigna $19,101.0 $18,414.0
$292.0 $1,302.0 $1.05 $4.73
Coventry $11,734.2 $13,903.5
$381.9 $242.3 $2.54 $1.64
Health Net $15,366.6 $15,713.2
$95.0 -$49.0 $0.88 -$0.47
Humana $28,946.4 $30,960.4
$647.2 $1,039.7 $3.83 $6.15
UnitedHealth Group $81,186.0 $87,138.0
$2,977.0 $3,822.0 $2.40 $3.24
WellPoint $61,251.1 $65,028.1
$2,490.7 $4,745.9 $4.76 $9.88

Note: Coventry reports operating revenues, which excludes investment income or losses.

Source: Company filings with the Securities and Exchange Commission

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