The LifePoint-Duke parn­er­ship

In­sur­ers ex­pect lower prof­its as they cope with higher costs, new reg­u­la­tions

Modern Healthcare - - Front Page - Re­becca Ve­sely

IN­SUR­ERS>>

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.

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