Insurers' profits rise as they spend less on care

Plans say there is no reason to lower premium increases because they expect patient traffic to pick up. But analysts aren't so sure.

By Emily Berry — Posted Nov. 22, 2010

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Health insurers are reporting stronger earnings, in large part because fewer of their members appear to be going to their doctors.

Insurers and analysts give varying reasons why plans are spending less on care than expected -- the overall economy, higher-deductible plans, better cost management by insurers, a flu season that wasn't as bad as anticipated. But insurers agree that there is no reason to reduce their premium increases or increase spending on care, including bumping up physician pay, even as they face minimum medical-loss ratios in 2011 mandated by the health system reform law.

After all, the plans say the decline in utilization for 2010 is probably an unusual event -- though many analysts disagree. "We're going to assume that we get back to more normal [utilization] rates in the future, and that's just our ongoing assumption at this point," Humana Chair and CEO Michael McCallister said in a conference call with investment analysts. His company reported a 3% decline in utilization in the third quarter of 2010. "And it's going to take an awful lot more data and time for us to get comfortable that we've seen a sort of a permanent change."

Net earnings for the third quarter of 2010 rose for all but one of the seven largest publicly traded health plans, compared with the same period in 2009. At some of the largest plans, the percentage year-over-year increases were well into the double-digits -- like their price increases in many states, particularly in the individual market.

Health care use lower

One unexpected decline for many plans was the reduction in members' use of health care.

Overall, medical-loss ratios -- the percentage of premium dollars spent on health care -- for the third quarter of 2010 ranged from Coventry Health Care's 77.2% to Health Net's 86.3%. Most plans came in at the low 80s, below analysts' expectations. Cigna was the only insurer to report an earnings decline, which it attributed to nonhealth business.

Investment analysts pressed plans on whether the economy and higher-deductible plans had members simply avoiding treatment because they couldn't afford it. Coventry said during its conference call that half its members have deductibles of $1,000 or more.

Generally, plans did not see things quite that way.

In the third quarter of 2010, most plans earned millions of dollars from "prior period reserve development" -- money set aside for care that ended up not being given. Much of that was from a 2010 flu season that was far less severe than anticipated.

However, plans saw other declines as well. Humana said its drop in members' health spending was driven by less "severity," meaning fewer expensive hospital visits.

During Humana's analyst call, McCallister said some of that reduced "severity" was because of the economy. In 2009, people "were moving all their spending forward as they're worried about losing their jobs." In 2010, with unemployment rates stabilizing -- though still high -- and government-mandated extension of COBRA no longer in place, "I think we've seen a whiplash in the other direction this year," McCallister said.

McCallister, though, said the reduction also was a tribute to Humana's operations. The company is "getting better at figuring out what the appropriate care is and making sure that the people who really need that care get it. And again, continuing to bargain for rates."

Meanwhile, UnitedHealth Group Chair and CEO Stephen Hemsley said consumers' greater knowledge of how to manage their health reduced utilization. "I actually think people are more engaged. Our data would suggest people are more engaged with their health care, more informed consumers," Hemsley said during UnitedHealth's earnings conference call with analysts. "The consumer designs ... enable them to use the health care system in a more intelligent, informed way."

Shareholders reap rewards

For now, the companies are using their gains to reward shareholders.

For example, Aetna announced Sept. 24 that it would pay shareholders a dividend of 4 cents per share on Nov. 30, and during the third quarter, it spent $526 million to buy back 17.8 million shares. UnitedHealth announced on Nov. 3 that it would pay a dividend of 12.5 cents per share to its investors on Dec. 21. During the first nine months of the year, UnitedHealth spent $1.9 billion to repurchase 59 million of its shares, including 20 million shares in the third quarter. Buying back stock signals that the company believes the stock is undervalued, and boosts per-share earnings numbers.

However, insurers expect that they will start spending more on health care in 2011. The Patient Protection and Affordable Care Act requires insurers next year to maintain a minimum 80% medical-loss ratio. That means 80% of premiums they collect for individual and small-group policies must be spent on patient care and quality improvement.

For large-group plans, the requirement is 85%. Plans would need to write rebate checks to the government if those minimum levels aren't met. The government has not yet released its definition of what exactly constitutes medical costs.

Plans said they expect to spend more not only because of medical-loss requirements, but because of mandates such as allowing those under age 26 to stay on their parents' plans, tighter rules on rescissions, and an end to lifetime limits on benefits.

Executives said they expect utilization to return to "normal" levels.

Analysts aren't so sure -- even taking health reform into account. "We think these weak volumes will be a multiyear trend, lasting well beyond 2010," Goldman Sachs investment analyst Matthew Borsch wrote in a note to investors. Dave Shove, an analyst with BMO Capital Markets, wrote: "We believe that cost trends will fall for at least another 18 months. ... This should cause earnings to move upward significantly."

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Insurers' profits stay healthy in third quarter

Health plans say 2010 will turn out to be highly profitable, due largely to members not going to the doctor as much as expected, and "pricing discipline" -- not lowering rates despite continued membership drops at their highest-profit business, commercial risk plans. Dollars are in millions.

Revenue Net income Earnings per share
Plan 3Q09 3Q10 (change) 3Q09 3Q10 (change) 3Q09 3Q10 (change)
Aetna $8,722 $8,539
$326 $498
$0.73 $1.19
Cigna $4,517 $5,266
$330 $308
$1.19 $1.13
Coventry* $3,444 $2,836
$71 $190
$0.48 $1.29
Health Net $3,969 $3,393
-$66 $63
-$0.64 $0.64
Humana $7,717 $8,425
$302 $393
$1.78 $2.32
UnitedHealth Group $21,695 $23,668
$1,035 $1,277
$0.89 $1.14
WellPoint $15,425 $14,598
$730 $739
$1.53 $1.84

*Unlike the others listed, Coventry Health Care reports "operating revenues" excluding investment income and losses, rather than combined revenue.

Note: In the cases of both Health Net and Coventry, one-time charges against earnings in the third quarter of 2009 were responsible in part for the unusually high jump in earnings in 2010 compared with the previous year.

Source: Company filings with the Securities and Exchange Commission

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