Profits keep rolling in for big insurers despite reform

Profits at the nation's seven largest publicly traded insurers went up in 2010 as plans spent less on care and used income to buy back their stock to boost per-share earnings.

Net earnings rose in 2010 compared with 2009 for six of the seven largest shareholder-owned plans.

Health Net saw the greatest improvement from 2009 to 2010, from a 47-cent-per-share loss to a $2.06 per-share profit. Cigna saw the most modest increase, with a 3% improvement from $4.73 per share in 2009 to $4.89 per share in 2010.

WellPoint's per-share profits sank by 30% for the year, largely because 2009 net income included a windfall from the sale of its pharmacy benefit management company.

Revenue for WellPoint, Aetna, Health Net and Coventry Health Care dropped, with declines ranging from 1% to 16%. But insurers spent less on medical care for members, so they were able to profit despite the drop in incoming premiums.

Medical-loss ratios -- the percentage of each premium dollar spent on medical care -- dropped for six of the seven biggest health insurers in the fourth quarter of 2010 compared with the fourth quarter of 2009, because of a continuing slowdown in the rate of growth in medical spending.

Insurers have said they expect utilization to return to normal in 2011. Analysts, however, say the economy probably won't recover quickly enough for that to happen, so they say insurers probably are overestimating what they will spend on care in 2011.

Insurers had been worried about measures in the Patient Protection and Affordable Care Act that took effect in 2010, specifically elimination of some co-pays for preventive care and lifetime limits for coverage, but those turned out not to cost plans as much as they had expected.

"The operating environment for commercial insurers continues to improve as federal agencies issue guidelines with softer language and delayed compliance dates," Dave Shove, a health care investment analyst with BMO Capital Markets, wrote in a Jan. 26 note to investors.

Insurers used their good fortune to reward shareholders. Aetna and UnitedHealth Group paid out millions in dividends in 2010. During the year, they and other big insurers bought back millions of dollars in their own stock, boosting per-share earnings for investors.

In 2010, Aetna, for example, spent $1.6 billion buying back 52.4 million shares of its stock -- twice what it spent on buybacks in 2009. If the number of outstanding shares had remained the same as in 2009, per-share earnings for 2010 would have been $3.93 instead of $4.18, a 6% difference.

Aetna spent $16.1 million on dividends to shareholders and agreed to buy health information technology firm Medicity for $500 million using "available resources."

Cautious optimism for 2011

With a better-than-expected 2010, health plan executives generally sounded cautious in discussing expectations for 2011. All seven plans projected that per-share earnings for the year would be slightly less than what they brought in for 2010.

But things they were most worried about this year, such as the medical-loss ratio rule, might be delayed or their effect softened.

Dozens of states have applied for a waiver for insurers that cover people in the individual health insurance market, asking the Dept. of Health and Human Services not to enforce the 85% minimum medical-loss ratio rule on those companies because it could push them out of strained markets. If those waivers are approved, it would let health plans off the hook for paying rebates to members if the company spends less than 85% of premiums on medical care.

Beyond the medical-loss ratio minimums, health plans said an economic rebound could send members back to the doctor, which would run up costs and hurt profits. The below-average severity of the 2010 flu season probably will not be repeated, and the implementation of other pending health reform measures leaves a lot of market uncertainty, the plans said.

When investment analysts asked health plan executives if prices were dropping for 2011, most said the pricing remains "rational" -- meaning no health insurers are lowering prices to win new members.

There probably will not be increases in physician pay to meet new medical spending requirements. Plans would rather pay back member rebates after the fact if medical spending is too low to meet the new federal minimum medical-loss ratio rule.

"We're just going to run our business the way we always need to run it, and then we'll deal with the rebates afterwards," Aetna President, CEO and Board Chair Mark Bertolini said during the company's fourth-quarter earnings conference call.

Health plans are right to be cautious about 2011, said Debra Donahue, vice president of market analytics for Mark Farrah Associates, based in Kennebunk, Maine.

There are still parts of health system reform that could hurt profits, and health plans already are running at a 5% to 7% margin, compared with margins that were closing in on 10% seven or eight years ago, she said.

"It isn't unhealthy, but it's nowhere near where it was a few years ago," she said.