Health plans say they'll risk losing members to protect profit margins

Meanwhile, businesses and individuals are dropping coverage in the wake of higher insurance premiums.

By — Posted May 19, 2008

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The nation's largest publicly traded health plans say they don't plan to temper premium increases for the sake of keeping members on their rolls -- particularly not while they are under pressure from Wall Street over what it sees as their disappointing earnings.

Wall Street analysts were shaken over the long-term prospects of the health plan business after bellwethers WellPoint and UnitedHealth Group, the nation's two largest private-pay plans, reported less-than-expected profits from the first three months of this year.

While no plan said its overall membership has gone down, most say their risk-based commercial numbers -- representing traditional employer health benefits -- are declining or are not growing as quickly as anticipated. But health insurers say cutting premiums or reducing the rate of increase to keep customers would affect their bottom lines more than losing some members over premium hikes.

"We will not sacrifice profitability for membership," WellPoint President and CEO Angela Braly told analysts during a conference call.

Coincidentally, WellPoint and other health plans reported their earnings -- and their willingness to sacrifice members to keep them up -- soon before, or during, Cover the Uninsured Week. The project, sponsored by the Robert Wood Johnson Foundation, puts a spotlight on the growing number of uninsured.

The foundation, during the April 27-May 3 event, put out a report saying that the number of private-sector establishments offering health insurance declined to 56.3% in 2005 from 58.3% in 2001 as the cost of those benefits went up nearly 29.6% in the same period. Increasing premiums have been "a big driver in the rise of the uninsured," foundation spokesman Michael Berman said. According to the U.S. Census, the number of uninsured in the U.S. rose from less than 45 million in 2005 to 47 million in 2006, the most recent estimate available.

Plans say they are not trying to price people out, pointing out various niche products they have introduced to make insurance more affordable.

"Our members are trying to provide the most affordable coverage options they can to meet people's needs," said Robert Zirkelbach, spokesman for trade group America's Health Insurance Plans. But he also noted that as medical costs rise -- with most plans reporting the percentage of revenue they spend on care up sharply -- plans generally must boost premiums to cover them.

Consolidation over recent years is allowing insurers to raise premiums as well as continue to attack physician reimbursement as a means of attempting to keep profits up, said Susanne Madden, president and CEO of the Verden Group, a health care consulting group in Nyack, N.Y. "With consolidation and there being fewer players comes a certain amount of arrogance," she said. "The response from the insurers is quite miserly."

In addition, consolidation gives health plans negotiating power over physician reimbursement, thereby driving down medical costs. In trying to persuade investors that WellPoint's problems are "fixable," CEO Braly emphasized WellPoint's market power, which she said gives it the ability to lean hard on its network doctors to accept lower reimbursement.

Insurers, along with analysts, blamed profit pressures on plans' difficulty in keeping a lid on medical costs, along with lower investment income, fewer people employed with benefits, and a particularly hard flu season.

Falling numbers

WellPoint, with 35.4 million medical members, and United, with 32.4 million, were among the plans saying that small businesses were the most likely to drop coverage in the face of premium hikes. A survey released by the consulting firm Mercer found that 61% of businesses with 10-199 employees offered health benefits in 2007, down from 69% in 2001.

Meanwhile, analysts say large employers are fighting premium increases by self-insuring, which shifts the medical cost risk to themselves but puts plans in the less profitable role of administrators.

For example, United reported that its commercial risk-based membership decreased to 10.6 million, down 4.2% from last year, while its fee-based membership increased 8.9% to 16 million. (Overall, commercial membership growth at United was up 3.2%, to 26.6 million.) United expects to lose $1 billion in revenue this year because of a greater-than-expected number of businesses switching from risk-based to fee-based services.

Health plans' business models will prevent them from doing anything other than addressing their profits, said James King, MD, a family physician in Selmer, Tenn., who is president of the American Academy of Family Physicians.

"They have a problem in that they are for-profit corporations. They've got to answer to their stockholders and look for profit," he said. "At the same time they do have a responsibility to society. They need to make sure they are working together to make sure as many people are insured as possible by holding down premiums."

And while the trade group AHIP has offered its own market-based plan for reducing the number of uninsured, individual insurers say they aren't in a position to slash rates just to keep members.

United CEO Stephen Hemsley told investors: "We continue to protect our margins. ... We are committed to sustaining a quality business without taking shortsighted pricing positions." He spoke after United's stock dropped 11.5% in a day when it reported earnings of 78 cents per share -- up 12 cents over last year, but falling short of analysts' estimate of 80 cents.

Madden said insurers might be reaching the limit of their ability to keep hiking premiums and extracting savings from physicians without significant backlash. "Are we at the end of where insurance companies can actually charge these premiums? I think it's right around the corner, but the insurance companies don't recognize that yet."

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Priced out

Employers and employees are buckling under the weight of rapid increases in health insurance premiums, says a study by the Robert Wood Johnson Foundation. Employers are passing on a greater share of the cost to workers, but some are deciding to drop coverage altogether. Coverage at private-sector establishments:

Average family premium$8,281$10,72829.6%
Percentage that offer health insurance58.3%56.3%-3.4%

Note: Premiums are in 2005 dollars per enrolled employee

Source: "Squeezed: How Costs for Insuring Families are Outpacing Income; a State-by-State Analysis," Robert Wood Johnson Foundation, April

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Eroding benefits

The most recent annual survey by human resources consulting group Mercer showed that small companies, with 10-199 employees, in particular are dropping benefits in response to rapid growth in costs.

Small establishments
offering health coverage

Source: "National Survey of Employer-Sponsored Health Plans 2007," Mercer, November 2007

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Health plan earnings

The country's largest publicly traded health plans reported diminished first-quarter earnings. While most saw profits rise, the increase did not reach Wall Street analysts' expectations. Most of these plans have slashed expected earnings-per-share estimates for the year, sending their stock prices down. Except for earnings per share, all dollar figures are in millions.

First-quarter financial results:

RevenueNet incomeEarnings
Aetna$7,738.7$6,700.0 (5.5%)$431.6$434.6$0.85$0.81 (4.9%)
Cigna$4,569.0$4,374.0 (4.5%)$58.0$289.0$0.21$0.98 (-78.6%)
Coventry$2,940.6$2,236.5 (31.5%)$125.0$121.7$0.81$0.76 (6.6%)
Health Net$3,836.8$3,428.9 (11.9%)-$35.7$88.6-$0.33$0.77 (-142.9%)
Humana$6,959.7$6,204.8 (12.2%)$80.2$71.2$0.47$0.42 (11.9%)
UnitedHealth Group$20,304.0 $19,047.0 (6.6%)$994.0$927.0$0.78$0.66 (18.2%)
WellPoint$15,553.7$15,088.0 (3.1%)$588.1$783.1$1.07$1.26 (-15.1%)

Note: Cigna earnings for health care only were $138 million, down from $168 million in the first quarter OF 2007. Most of Cigna's earnings decline represents SEC-mandated changes in how Cigna must account for losses in its reinsurance business. Health Net first-quarter 2008 earnings include legal costs and writedowns related to reductions in operations. Without those, earnings were 16 cents per share.

Source: Company filings with the Securities and Exchange Commission

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