business

Health insurer earnings telegraph uptick in spending

More visits to doctors’ offices may not be the reason for growth.

By Emily Berry — Posted May 21, 2012

Print  |   Email  |   Respond  |   Reprints  |   Like Facebook  |   Share Twitter  |   Tweet Linkedin

Health insurers are trying to figure out when patient traffic to physician offices is going to start growing again. Their consensus after releasing earnings covering the first three months of 2012: Things might be picking up, but we’re not sure.

Plans such as Aetna and Humana reported declining earnings because of higher-than-expected medical-loss ratios, a “medical loss” being the term for spending money on care, including paying physicians. Aetna also was among the plans whose earnings were no longer being boosted by “prior period reserve development” — money set aside for care that was never spent. During the last few years, that money has helped boost plan earnings, but Aetna said its health spending met forecasts, leaving no extra cash left over.

However, not every plan was in the same boat. For example, UnitedHealth Group, the largest private payer by enrollment and revenue, noted its medical-loss ratio dropped to 81% from 81.4% from the first quarter of 2011. United carried over $530 million in money set aside for care, but never spent, into the first quarter of 2012, up from $440 million in the first quarter of 2011.

“Everybody is sort of feeling for the bottom here, where a trend stops decelerating and starts to tick up,” Aetna President, Chair and CEO Mark Bertolini told Goldman Sachs analyst Matthew Borsch during the company’s earnings conference call April 26. “And, quite frankly, we don’t have enough information in the first quarter to come up with a prediction as to where that trend number is right now.”

Visits to doctors’ offices declined 4.7% in 2011, according to a survey released in April by the IMS Institute of Healthcare Informatics. That was the fourth decline in five years, and the IMS survey is one of many that has recorded a drop in patient visits and has blamed that drop on patients cutting back in a slow economy. Also, prices for physician services have stayed in check, with their inflation rate lagging the overall rate each of the 12 months previous to April 2012, according to the Bureau of Labor Statistics.

However, some plans said they noticed greater patient utilization, and that prices for various services (particularly joint replacements) seemed to be accelerating. United was the only one of the seven largest publicly traded health plans that reported a decline in its medical-loss ratio. Cigna did not report a number, and the other five reported a gain.

The reasons for the gains varied. For example, WellPoint reported higher-than-expected claims from a Northern California Medicare plan it bought. However, plans generally were not able to overcome any higher health spending with money not spent previously. For example, Humana reported a favorable prior-year’s reserve development of $112 million for the first quarter of 2011, helping boost its net income to $1.86 per share. A year later, Humana’s earnings did not include that kind of benefit, and net income fell by 20%, to $1.49 per share. Aetna and Cigna’s per-share earnings also dropped. Although WellPoint’s per-share earnings figure increased, its cash profit dropped by 8%, to $857 million.

Assessing plans’ first-quarter earnings, Borsch described a “somewhat tougher earnings environment” in a note to investors. “While we expect that utilization volume growth will remain moderate, cost trends are no longer a source of positive surprise for most companies,” he said.

As investment analysts pressed insurers for details about utilization patterns, the answers varied, but most said they were seeing a gradual acceleration of growth, or that they hadn’t seen spending speed up yet, but were expecting to. Bertolini said

Aetna projected physician service spending to grow at a rate “in the high single digits” for the year, only a one- or two-percentage point acceleration. WellPoint forecast an increase in physician service spending in the “mid-single digits.” Cigna reported seeing continued “muted” utilization trends through the first part of 2012. Humana said it still expected an uptick, but hadn’t seen signs yet in the first quarter than it had arrived.

Coventry reported signs of a slight increase in outpatient physician service spending. United executives said outpatient volumes looked to be gaining speed, while inpatient volumes remained flat.

Health Net, the smallest of the seven big shareholder-owned plans, saw its quarterly medical-loss ratio rise from 86.5% to 89.6% from a year earlier. According to a note from CRT Capital Group Investment analyst Sheryl Skolnick, the company “missed the uptick in utilization and therefore may have mispriced plans for 2012. It therefore incurred higher claims expense than originally anticipated in prior periods.” While the company lost 32 per cents per share in the first quarter of 2012, Health Net’s earnings actually rose 75%, a result of variances in one-time charges in each quarter.

Plans also reported one-time losses on acquisitions (as Cigna did), getting Medicare Advantage plans ready to meet minimum federal medical-loss ratios in 2014 under the Patient Protection and Affordable Care Act (as Humana did) and to make adjustments in operations (as United did, with spending to bring pharmacy benefits in-house).

In the meantime, the question of whether the health reform law will be struck down by the U.S. Supreme Court looms in the background for everyone following the industry. The plans said they would operate as if health reform were to continue while the court reviews the law.

As Borsch wrote in his May 9 note, “While our rating actions are stock/company-specific, they are directionally consistent with our sector view of constrained margins with medical cost trends no longer a ‘tailwind.’ & However, near term, these factors are overshadowed by next month’s expected ruling from the Supreme Court on health reform.”

Back to top


ADDITIONAL INFORMATION

Insurers collect more and spend more in first quarter

Without the unexpectedly low utilization that boosted many companies’ profits in 2011, most of the largest shareholder-owned health plans saw year-over-year declines in earnings for the first quarter of 2012. Whether utilization rises or not, investment analysts say the long-range picture for the industry depends most on a U.S. Supreme Court decision on health system reform. Except for earnings per share, all dollar figures are in millions.

Revenue Net income Earnings per share
Plan 1Q11 1Q12 (change) 1Q11 1Q12 (change) 1Q11 1Q12 (change)
Aetna $8,388 $8,916 (6%) $586 $511 (-13%) $1.50 $1.43 (-5%)
Cigna $5,411 $6,788 (25%) $414 $371 (-10%) $1.51 $1.28 (-15%)
Coventry $3,049 $3,692 (21%) $110 $171 (55%) $0.73 $1.20 (64%)
Health Net $3,363 $2,830 (-16%) $-108 -$27 (75%) -$1.16 -$0.32 (72%)
Humana $9,191 $10,219 (11%) $315 $248 (-21%) $1.86 $1.49 (-20%)
UnitedHealth Group $25,432 $27,282 (7%) $1,346 $1,388 (3%) $1.22 $1.31 (7%)
WellPoint $14,894 $15,415 (3%) $927 $857 (-8%) $2.44 $2.53 (4%)

Note: Coventry revenue figures reflect operating revenue only, and thus exclude investment gains and other sources of income.

Source: Company filings with the Securities and Exchange Commission

Back to top


ADVERTISEMENT

ADVERTISE HERE


Featured
Read story

Confronting bias against obese patients

Medical educators are starting to raise awareness about how weight-related stigma can impair patient-physician communication and the treatment of obesity. Read story


Read story

Goodbye

American Medical News is ceasing publication after 55 years of serving physicians by keeping them informed of their rapidly changing profession. Read story


Read story

Policing medical practice employees after work

Doctors can try to regulate staff actions outside the office, but they must watch what they try to stamp out and how they do it. Read story


Read story

Diabetes prevention: Set on a course for lifestyle change

The YMCA's evidence-based program is helping prediabetic patients eat right, get active and lose weight. Read story


Read story

Medicaid's muddled preventive care picture

The health system reform law promises no-cost coverage of a lengthy list of screenings and other prevention services, but some beneficiaries still might miss out. Read story


Read story

How to get tax breaks for your medical practice

Federal, state and local governments offer doctors incentives because practices are recognized as economic engines. But physicians must know how and where to find them. Read story


Read story

Advance pay ACOs: A down payment on Medicare's future

Accountable care organizations that pay doctors up-front bring practice improvements, but it's unclear yet if program actuaries will see a return on investment. Read story


Read story

Physician liability: Your team, your legal risk

When health care team members drop the ball, it's often doctors who end up in court. How can physicians improve such care and avoid risks? Read story

  • Stay informed
  • Twitter
  • Facebook
  • RSS
  • LinkedIn