Plans report healthy profits despite new cost demands

In 2011, the first full year of operations after passage of health system reform, the nation's largest for-profit publicly traded plans mostly were able to keep profits up despite new requirements on medical spending.

Aetna, Coventry Health Care, Humana and UnitedHealth Group reported double-digit percentage growth in net earnings for 2011 compared with 2010.

Cigna and WellPoint saw slight declines in overall profits, but WellPoint managed to buy back enough shares of stock to boost per-share earnings higher in 2011 than in 2010. Health Net earnings and revenue fell largely because of changes in accounting for its TriCare military health contract. The company now only records revenues and expenses associated with administrative services and related performance incentives.

The 2011 full-year earnings were the first in which health plans assessed the impact of a provision of the Patient Protection and Affordable Care Act that requires insurers to spend 80% of every premium dollar on care in the individual and small group markets and 85% in the large group market.

Plans that don't meet those medical-loss ratio minimums are scheduled to send rebates of the difference to consumers beginning in August 2012. The ratio is calculated on each line of business in each state.

Funds set aside

Insurers said they were putting aside cash to cover rebates. In most cases, plans reported a one- to two-percentage point increase in fourth-quarter 2011 medical-loss ratios for their commercial business, in part because of setting that cash aside.

Individual plans did not say exactly how much they expected to pay in rebates, which some analysts have estimated could run from $600 million to $1.5 billion for all plans combined.

Aetna -- whose commercial medical-loss ratio actually fell to 79% in the fourth quarter of 2011, down from 80.7% in the like period in 2010 -- gave some hint, though, of how much it might have to pay.

During a conference call with stock analysts, executives said, "Fewer than 20% of our core commercial pools are in rebate status for 2011, and these pools represent approximately 35% of the corresponding premiums." The company told analysts it was putting aside enough money to cover rebates it expected to pay during the next four years.

All plans said they spent less on medical care than they expected in 2011, mirroring various surveys finding a drop in the number of patients coming to a doctor's office. However, the companies said they will continue to set premium prices as if a utilization rebound is coming -- just like they did in 2011 after medical spending was less than expected in 2010.

Looking out for reform

Some analysts believe health plans may be stockpiling as much cash as possible to prepare for the bigger wave of health system reform changes that will start in 2014 with the implementation of the individual mandate, said Jon Christianson, PhD, James A. Hamilton chair in health policy and management at the University of Minnesota School of Public Health.

He said insurers aren't sure how much those newly insured people will cost to insure, but they are worried that the recently uninsured will use a lot of health care. In anticipation of that possibility, they're pricing coverage conservatively even in 2012.

"It's a pretty complex environment for both insurance companies and providers right now, and it's natural you may see a lot of stockpiling of cash," he said.

Even health plans where executives admitted they had seen no sign of a return to historic utilization -- Aetna and Cigna, for example -- said they had set prices for 2012 as if an uptick eventually would appear this year.

"We're making assumptions that utilization will escalate off the lower levels that exist today," Cigna President and CEO David Cordani told investment analysts during an earnings conference call on Feb. 2. "To the extent it doesn't manifest itself or manifests itself more slowly, we'll see that in our results as we go forward."

Investment analysts are now accounting for that kind of conservativism as they project profits for the year. Despite the market's hesitation over health plans' future, the industry analysts say executives probably are playing it safe in their projections. Analysts expect most of the plans to report even higher profits in 2012.

"UnitedHealth Group and their competitors are pricing products for 'normalized' trend, a level of expense that we do not anticipate reaching," Dave Shove, a health insurance investment analyst at BMO Capital Markets, wrote in a note to investors on Jan. 20. "We ... anticipate 2012 will bring another year of successful underwriting and earnings growth for managed care -- UnitedHealth Group included."