Health plans warn Wall Street about falling 2011 earnings

Insurers blame requirements of the health system reform law for cutting into their profits.

By Bob Cook — Posted Dec. 29, 2010

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Health plans are beginning to alert Wall Street exactly how less profitable they think they will be in 2011 because of health system reform.

Expected changes after the passage of the Patient Protection and Affordable Care Act include more patients using services as more get insured, a reduction in payments for private Medicare plans and minimum medical-loss ratio requirements of 80% to 85%, depending on the plan. In recent quarters, health plan earnings have risen despite declines in revenue, as the companies spent less on care, with overall medical-loss ratios for companies in some cases falling below 80%.

On Nov. 29, UnitedHealth Group informed investors that it expects 2011 profits to be $3.50 to $3.70 per share. That's down from its original guidance of $3.85 to $3.95. Even before the government released on Nov. 22 what can count toward the medical-loss ratio -- the amount spent on medical care divided by the amount of premiums collected -- United executives had warned Wall Street analysts that 2011 might be more difficult than expected because of other aspects of health reform, as well as the underlying economy.

United and other plans have seen their highest-profit business -- commercial risk -- drop as companies laid off employees or decided that it cost less to take on the risk themselves and hire plans merely as administrators.

On Nov. 18, before the final medical-loss rules were issued, Humana warned investors that its profit forecast for 2011 was at $5.35 to $5.55 per share, below the $6.40 to $6.50 per share it expects to book in 2010. Humana, which is heavily invested in Medicare Advantage plans, said cuts to private Medicare were a large factor in revising 2011 earnings downward.

None of the other seven large publicly traded health plans has issued similar guidance as of this article's deadline. However, Wall Street analysts said that, so far, the revisions have not been as severe as they had feared.

Nonprofit plans are also beginning to make moves they said are predicated upon the changing landscape of health system reform. On Dec. 10, the Pittsburgh Post-Gazette reported that Highmark, Pennsylvania's largest health insurer, had hired IBM to observe its offices to determine what work could be outsourced to India, where Highmark began outsourcing earlier in 2010.

The observation is being done at Highmark's Pittsburgh headquarters and facilities, as well as at its Mountain State Blue Cross Blue Shield subsidiary in West Virginia. Highmark told the newspaper it expects the review to be done by the third quarter of 2011.

Highmark said it needs to cut administrative costs as it complies with health system reform. However, state Rep. Tony DeLuca of Pennsylvania said he will seek House Insurance Committee hearings about Highmark's plans. Politicians in West Virginia also have asked Highmark to reconsider plans to move work out of that state.

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