The LifePoint-Duke parnership
Insurers expect lower profits as they cope with higher costs, new regulations
Most major health insurers are expecting higher medical costs and new federal regulations to drive smaller profits this year than in 2010. Five of the top insurers said on year-end earnings calls in recent weeks that these factors will combine to create uncertainty in the coming year.
A mild flu season and weather disruptions that kept people from getting to a doctor meant lower-than-average utilization last year, contributing to insurer profits.
UnitedHealth Group, the largest insurer by revenue, reported nearly $8 billion in earnings last year, up about a third from $6 billion in 2009. WellPoint, which operates Blues plans in 14 states, saw its income fall 40% to nearly $3 billion, down from close to $5 billion in 2009. However, the 2009 income included proceeds of $2.2 billion from its sale of NextRx, a pharmacy benefit manager.
This year, top executives at the major insurers said they expect a tougher go of it, even with the economy expected to continue its recovery. WellPoint and UnitedHealth Group have said they expect earnings this year to be below 2010.
In late December, WellPoint instituted a salary freeze for all executives at the vice presidential level or above, and raises among all employees as well as bonuses will be more sparse in 2011. The Indianapolis-based insurer is also lowering its retirement contributions for employees.
By contrast, Aetna, the third-largest commercial insurer, told investors Feb. 4 it is expecting this year at least 13% above Wall Street targets, in part because of belt-tightening, including lower administrative costs and a switch from a defined-benefit pension plan to a 401(k) plan for employees. Still, the Hartford, Conn.-based insurer said it too would be facing regulatory and economic pressures.
Two new major federal regulations for health plans are on deck for this year. First is the requirement in the health reform law that requires insurers to spend at least 80% of member premiums on medical care and quality improvement for individual policies. Insurers must spend 85% of member premiums on medical care for small-group policies.
WellPoint, for instance, is expecting “a $300 million headwind to overall operating income” in 2011 related to the impact of medical loss ratios, according to President and CEO Angela Braly. Insurers are waiting for the final rules on medical loss ratios from the HHS, which are expected soon.
The second rule that will affect insurers is federal rate review, which goes into effect July 1. The HHS secretary, working with states, will have the authority to scrutinize premium rate increases. This will likely put pressure on insurers to keep down rates.
Insurers also said they are expecting pricing pressure from hospitals if states reduce their Medicaid budgets.
“It’s early and there is much to be learned about the coming year, including the level of medical system demand, job creation and the employment environment and funding levels for public programs,” Stephen Hemsley, president and CEO of UnitedHealth Group, said on a Jan. 20 investor call. “2011 will be the first year UnitedHealthcare operates under the new minimum loss ratio and rate review regulations.”
David Cordani, president and CEO of Cigna Corp., told investors on a Feb. 3 call that 2010 was “a year of disruption and change.” This year, higher medical service utilization and medical loss ratio requirements are expected to have an impact on earnings.
Health Net, based in Woodland Hills, Calif., which is expecting medical membership growth of between 2% and 3% this year, is already meeting minimum medical loss ratios and has few members in individual and small-group plans. A large portion of Health Net’s business is capitation. As a result, the insurer seems to have a rosier picture for the year.
Insurance executives emphasized greater collaboration with providers on their earnings calls. WellPoint, for instance, touted its accountable care organization pilot program with three provider groups and medical home projects in eight states.
“We’re working on making sure that those are programs we can really scale for the future,” Braly said on a Jan. 26 investor call. “But we need to move forward on this and we feel like we are.”
In this new reform environment, some major insurers, such as WellPoint and Health Net, seem to be sticking to their core business of managed care, while others, such as Aetna and UnitedHealth Group, appear to be attempting to diversify by buying up health information technology companies.
It’s unclear which strategy will be successful, said Carl McDonald, managed-care analyst for Citigroup.
“Going forward, as strategies start to diverge, it is certainly possible that successes will become less of a function of execution and have a lot more to do with the wisdom of the various strategies that each of the plans pursue,” McDonald wrote in an investor note.