Insurer income falls as plans adjust to reduced spending, reform law

Six of the seven largest publicly traded health insurers recorded declines in income in the third quarter of 2011.

The decrease in net income compared with the third quarter of 2010 ranged from slightly less than 1% for UnitedHealth Group to 35% for Cigna and Coventry Health Care, where litigation costs cut into profits. Humana was alone in raising its net income for the quarter, from $393 million to $445 million for the quarter, a 13% increase. However, five of seven plans increased their per-share earnings, mainly because of continuing efforts to buy back stock.

Income dropped for many health plans compared with 2010 for several reasons. First is a changing of expectations in health spending. In 2010, not only was health spending unexpectedly low, but plans booked additional profits from money set aside, but not spent, when care in 2009 also didn't meet expectations. Plans have adjusted their expectations and do not have as much of that set-aside money to add to their 2011 profits.

Plans are increasing spending as a result of efforts to conform with rules under the Patient Protection and Affordable Care Act that require insurers to spend 80% of every premium dollar on care in the individual and small group markets and 85% in the large group market beginning with 2011.

However, plans are setting aside money in case they do not reach those spending levels, which is a drag on earnings. The plans that don't meet that minimum will pay their first rebates by August 2012. Estimates of the total rebates due then range from $600 million to well over $1.5 billion, said Carl Mercurio, president of the Corporate Research Group, a health care consulting firm based in New York.

While reviewing their latest quarterly earnings figures in conference calls with investment analysts, the largest health plans fielded repeated questions from analysts who wondered how the companies will account for rebates due and set prices around medical-loss ratio minimums that took effect this year.

Mercurio said plans face one basic choice in dealing with medical-loss ratios: Should plans set prices lower, which probably would boost medical-loss ratios, but risk the plans' profit margins? Or should they risk having to pay out rebates the next year?

He said he expects the former to be more common, but either way the combination of medical-loss-ratio minimum and a premium tax will mean health insurers' relatively narrow profit margins will be squeezed.

"Rebates for 2011 should reduce health plan profits by 6% to 7%," he said. "It's a good chunk of profit for what's already a low-margin business."

Plans are too focused on controlling the cost of care and changing payment methodology to decide to boost fee-for-service payments to physicians simply as a way to increase medical loss ratios, said Kunal Pandya, a Chicago-based senior analyst with research firm the Aite Group

"It conflicts with other ideas reform is suggesting," he said, such as quality-based pay.

Instead, he said, many have adopted or integrated wellness programs and disease management into their benefit packages, because those programs can be counted as medical expenses.