Most health plan earnings up, but Wall Street is wary

Insurers must meet health system reform rules on medical-loss ratios by Jan. 1, 2011 -- a deadline that has plans and investors on edge.

By Bob Cook — Posted May 31, 2010

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For the first three months of 2010, almost all of the largest publicly traded health plans recorded strong earnings increases -- many of them because they spent less on care than they had during the first three months of 2009. Normally, that would be cheered by investors, analysts and the plans themselves.

However, one part of the new health reform law has those parties reacting tepidly to improvements in the medical-loss ratio -- the percentage of each dollar of revenue spent on health care. That item is a federal requirement that 80% of revenues for individual and small-group policies, and 85% of revenues for large-group coverage, be spent on medical care.

Among the seven largest publicly traded health plans, only Cigna, Humana and UnitedHealth Group reported growth in revenue in the first quarter of 2010 from the first quarter of 2009. Also, all but Health Net reported earnings gains, from Humana's 24.5% to Coventry's 120.0%

Despite ongoing declines in higher-profit commercial business, plans increased earnings thanks to tight control of expenses and a lighter-than-expected flu season. Coventry also was helped by shedding a high-cost PPO. Health Net benefited from these same trends, but it recorded a 23.8% decline because of write-offs related to the sale of its northeast U.S. business to United in late 2009.

However, when insurance companies held their quarterly conference calls with analysts, medical-loss ratio requirements, and how they would affect plans, were the hottest topic. Four of the six plans that report medical-loss ratios in their earnings reports (Cigna doesn't) said those numbers fell. WellPoint's went up slightly from 81.6% to 81.8%; Health Net's rose almost a percentage point. Overall ratios ranged from United's 81.3% to Health Net's 87.5%.

Plans tried to assure analysts that whatever the medical-loss ratio rules turn out to be, their companies won't take a big earnings hit. Cigna and Coventry Health Care, in particular, tried to emphasize that individual business, usually the product with the lowest medical-loss ratio, is a minuscule contributor to revenue.

"Might as well preempt a couple of questions I am sure we're going to get," Humana President and CEO Michael B. McAllister said during his company's conference call, after another executive acknowledged that Humana could not yet meet the 80% threshold on individual and small-group coverage. "We have not changed any business practices yet relative to the individual business because of that MLR requirement."

The National Assn. of Insurance Commissioners was scheduled to give its guidance on defining medical-loss ratio to Health and Human Services Secretary Kathleen Sebelius on June 1. She requested it to shape the rules on medical-loss ratio.

Numerous groups -- including the American Medical Association, which has had model health premium transparency legislation available since January 2009 -- sent comments to HHS by a May 14 deadline about how they think medical-loss ratio should be defined. The definition is scheduled to go into effect Jan. 1, 2011.

In a May 13 letter, AMA Executive Vice President and CEO Michael D. Maves, MD, MBA, wrote that medical-loss ratio should simply be "based on the amount [plans] spend on direct medical expenses, exclusive of whatever is spent on 'activities to improve health care quality.' " Other physician and hospital associations echoed that view.

However, health plans say they are seeking more flexibility on defining medical costs -- so much so that Senate Commerce Committee Chair Jay Rockefeller (D, W. Va.) said he believed insurers were trying to " 'game' the minimum medical-loss ratio requirement without changing their actual business practices."

A report released May 21 by Fitch Ratings, a credit-rating agency, said that depending on how HHS defines the expenses that can be counted as part of the medical-loss ratio, up to 13% of plans' earnings are "at risk." However, the agency said it's more likely that the drop would be in the neighborhood of 4% to 7%.

"Overall, assuming expense shifts are ultimately allowed into the MLR, the sector appears well-positioned to meet reform loss ratio requirements," the Fitch report said.

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A profitable first quarter -- too profitable?

Except for Health Net, every major publicly traded recorded healthy earnings gains during the first quarter of 2010. A lighter-than-expected flu season helped. But analysts worried that the numbers signaled that health plans had a ways to go before meeting government medical-loss ratio mandates. Dollars are in millions.

Revenue Net income Earnings per share
Plan 2009 2010 Gain (loss) 2009 2010 2009 2010 Gain (loss)
Aetna $8,619.5 $8,544.8 (0.9%) $437.8 $562.6 $0.95 $1.28 34.7%
Cigna $4,773.0 $5,205.0 9.0% $208.0 $283.0 $0.76 $1.01 32.8%
Coventry $3,532.9 $2,859.0 (20.0%) $44.2 $97.3 $0.30 $0.66 120.0%
Health Net $3,932.8 $3,416.1 (13.1%) $22.0 $16.1 $0.21 $0.16 (23.8%)
Humana $7,711.7 $8,440.6 9.4% $205.7 $258.8 $1.22 $1.52 24.5%
United $22,004.0 $23,193.0 5.4% $984.0 $1,191.0 $0.81 $1.03 27.1%
WellPoint $15,143.3 $15,098.5 (0.3%) $580.4 $876.8 $1.16 $1.96 68.9%

Source: Company first-quarter earnings reports filed with the Securities and Exchange Commission

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Medical-loss ratio issues

Wall Street usually applauds when health plans report declines in medical-loss ratios, the percentage of revenue spent on care. But federally mandated ratios are set to take effect in 2011. So instead, analysts worry that plans' mostly declining or steady medical-loss ratios in the first quarter of 2010 mean trouble in meeting those future standards.

Company Medical-loss ratio
Aetna 82.5%
Cigna n/a
Coventry 82.3%
Health Net 87.5%
Humana 83.4%
United 81.3%
WellPoint 81.8%

Note: Cigna does not release its medical-loss ratios.

Source: Company filings with the Securities and Exchange Commission

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