As more patients see physicians again, health plan earnings drop

The largest insurers note that medical spending has gone up after a long period of decreased office visits.

By Bob Cook — Posted Sept. 3, 2012

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Nearly every health insurer recorded declining earnings in the second quarter of 2012, mainly because of something that happened more often than they expected: patients going to see their doctors.

While all of the seven largest publicly traded health insurance companies recorded growth in revenue during the quarter, only UnitedHealth Group and Health Net recorded gains in net income and earnings per share. However, Health Net’s increase was the result of a $119 million gain from selling its Medicare Part D business to CVS Caremark; otherwise, Health Net’s net income and earnings per share would have fallen.

WellPoint recorded a 3% gain in earnings per share, but stock buybacks, which reduced the number of shares on the open market, helped push that number, given that WellPoint’s net income fell 8%. Under shareholder pressure over the company’s declining earnings and lackluster stock price, WellPoint Chair, CEO and President Angela Braly resigned effective immediately on Aug. 29. A search is on for her permanent replacement.

Of the plans recording earnings declines — as well as Health Net — only Cigna, which blamed nonhealth businesses, did not say that the fall was a result of health expenses climbing faster than expected. During the past few years, health plans have booked income from money put aside for health care, but not spent.

But in the second quarter of 2012, physician visit volume rose 4.8%, reversing two years of mostly declining rates, according to a June 23 research note from Charles Boorady, an investment analyst from Credit Suisse. So while Aetna had $188 million in prior-period health cost development — the formal term for money put aside but not spent in the previous quarter — in the second quarter of 2011, that total was down to $38 million in the second quarter of 2012. Health Net, in the same quarter, recorded a $61 million “adverse prior-period development,” which means the company recorded money that was spent on health but wasn’t budgeted.

Humana, while trumpeting increases in enrollment in its government plans, particularly Medicare, noted that new and existing members were showing up for care — and often needing a lot of it — because they had put off visits in the previous few years. The company said it would have an earnings shortfall of $270 million alone in 2012 for Medicare Advantage, $170 million from new members, and $100 million from existing members, because of greater-than-expected health costs.

“One potential cause we are in the process of analyzing suggests that [some] members may not have had access to prior coverage due to the difficult economy, and as a result have some level of pent-up demand which should ease over time,” Jim Murray, Humana’s executive vice president and chief operating officer, told analysts during a July 31 conference call.

Also, he told investors, the Centers for Medicare & Medicaid Services and private insurers have stepped up efforts to inform Medicare beneficiaries that they can get wellness visits and physical exams at no cost to them. Health spending has risen not only because of the cost of those exams but also because of follow-up care.

“During the first half of 2012, wellness visits per 1,000 members have increased over 200% from the prior year, and routine physicals are up 22% per thousand members year over year,” Murray said. “In addition to the cost associated with these specific procedures, there also appears to be related increases in additional procedures that are likely identified in the initial wellness visit or exam.”

Humana and other plans sought to reassure investors that they would not be surprised by spending in future quarters, and that, as Murray said, health cost growth might abate after those who had put off care because of tough economic times finished making up for lost visits.

Earnings were released as WellPoint and Aetna closed multibillion-dollar deals to buy rivals that would boost their government business in anticipation of more Medicaid beneficiaries under health reform, and as a way to build volume to counteract states cutting Medicaid managed care pay and federal health-reform related restrictions on Medicare Advantage contracts. Before it released earnings July 25, WellPoint announced it would spend $4.9 billion to buy Amerigroup, and then told investors that deal will give WellPoint business in the 19 states that make up 60% of Medicaid beneficiaries. On Aug. 20, after each company had reported its earnings, Aetna said it would buy Coventry Health Care, one of the seven largest publicly traded health plans, for $7.3 billion.

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Downward trend for health plan earnings

In the second quarter of 2012, most major, publicly traded health insurers said they spent more on care, and not just because the Affordable Care Act set minimum spending levels for plans. UnitedHealth Group was the only plan to see net income and earnings per share go up without an extenuating circumstance (Health Net’s gain was mostly due to money collected for the sale of its Medicare Part D unit). Except for earnings per share, all dollar figures are in millions.

Revenue Net income Earnings per share
Plan 2Q11 2Q12 (change) 2Q11 2Q12 (change) 2Q11 2Q12 (change)
Aetna $8,323 $8,827 (6%) $537 $458 (-15%) $1.39 $1.32 (-5%)
Cigna $5,507 $7,457 (35%) $391 $380 (-3%) $1.43 $1.31 (-9%)
Coventry $3,033 $3,518 (16%) $225 $92 (-59%) $1.50 $0.65 (-57%)
Health Net $2,652 $2,841 (7%) $58 $125 (112%) $0.63 $1.48 (135%)
Humana $9,284 $9,699 (5%) $460 $356 (-23%) $2.71 $2.16 (-20%)
UnitedHealth Group $25,234 $27,265 (8%) $1,267 $1,337 (6%) $1.16 $1.27 (9%)
WellPoint $15,101 $15,407 (2%) $701.6 $643.6 (-8.3%) $1.89 $1.94 (3%)

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

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