Health plans feel economic pain, brace for more

Executives warn investors that health insurers can't boost profits in today's economy. Analysts wonder if some plans might have to be bought out to survive.

By — Posted Nov. 24, 2008

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Health plans' profits are on the decline, and executives at many of those companies say that trend might not reverse itself soon. Those falling earnings are giving rise to speculation that a few plans might put themselves up for sale, leading to further industry consolidation.

Every publicly traded health plan saw profits fall in the third quarter, though WellPoint, the largest U.S. plan by membership, did report an increase in earnings per share. Plans say they are struggling with declining investment returns, falling membership and rising medical costs.

The economic crisis and uncertainty of the direction the federal government will take with health reform have combined with changes internal to the health care industry to alter the outlook entirely for health plans, said Jeff Bauer, PhD, a medical economist in Chicago. He is a health care futurist and partner in the management consulting practice for Michigan-based ACS Healthcare Solutions.

"The focus is going to be less on quarterly profits and more on who is going to survive."

In discussions with Wall Street analysts, the plans did not address physician payment. Joe Paduda, principal for Health Strategy Associates, a consulting firm based in Madison, Conn., said plans appear to have turned somewhat away from cutting reimbursements to boost profits. "Realistically, I don't think there's any more blood in that stone," he said.

Instead, plans often focused on warning investors -- as WellPoint and United HealthGroup did even before third-quarter earnings reports were issued -- not to expect the profit growth of the past.

"Under normal economic conditions, we would remain committed to our long-term operating earnings per-share growth of 15%. However, these are not normal times," Aetna Chair and Chief Executive Officer Ronald A. Williams said during a conference call with investors.

Aetna's third-quarter profits fell 39%, to 58 cents per share, in part because of a $139 million loss on investments -- the largest reported by any publicly traded plan. Investment income is generally used to shore up reserves and pension plans.

Wall Street is reacting to the plans' warnings by hammering stock prices. The only plans not to reach their 52-week low on the day of the earnings release were WellPoint and United, which reached that level when they issued their earlier warnings.

The soft stock prices could lead to further consolidation of health insurers, investment analysts say. They are focusing on Los Angeles-based Health Net and Coventry Health Care, based in Bethesda, Md. Executives at both companies have declined to discuss the possibility of a sale, but analysts say these companies are struggling more than others.

After taking one-time charges from investment losses and severance related to outsourcing, Health Net lost money in the third quarter. On Nov. 5, as it reported its earnings, Health Net announced longtime CEO Jay Gellert was removed from day-to-day supervision to focus on strategy and "how best to deploy the company's assets in the current competitive and economic environment." (See correction)

Coventry's executives blamed its declining profit on overall rising costs, noting specifically that Florida-based Vista Health Plans, which Coventry bought in 2007, had higher-than-expected medical costs.

Companies across the board are seeing declines in membership because more workers are losing their jobs and insurance in the weakening economy, analysts said. However, plans are still vowing not to cut premiums to keep membership, and in many cases they have raised prices.

The strategy worked for WellPoint. This year it gained 500,000 members -- despite losing 236,000 non-Blues customers -- to reach 35.3 million. Its per-share earnings increased by 10% from the third quarter of 2007. It didn't work for Cigna. Excluding gains from this year's purchase of Great-West Healthcare, it has lost about 100,000 of its 10 million members in 2008, which Cigna said was a reason why profits fell 50% from the third quarter of 2007.

It's uncertain how long health plans can keep raising premiums. "I think the mind-think is basically, 'We'll just keep hiking premiums.' Where does the 'Duh!' come in?" asked Susanne Madden, president and CEO of the Verden Group, a Nyack, N.Y.-based health care consulting group. "The higher premiums go, the less companies can afford to buy or even cost-share benefits for employees."

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Falling profits

In the third quarter of 2008, almost all of the country's largest publicly traded health plans saw a drop in earnings compared with the same period last year, and all saw net income drop. Executives blamed falling profits on higher-than-expected medical costs and lower employment levels, which translate into fewer purchasers of insurance. Except for earnings per share, all dollar figures are in millions. (See correction)

Third-quarter financial results:

RevenueNet incomeEarnings per share
Aetna$7,981.4$6,977.9 (14.4%)$277.3$496.7$0.58$0.95 (-38.9%)
Cigna$4,852.0$4,413.0.9 (9.9%)$171.0$365.0$0.62$1.28 (-51.6%)
Coventry$2,975.3$2,522.6.9 (17.9%)$85.5$168.7$0.58$1.08 (-46.3%)
Health Net$3,631.9$3,841.5.9 (-5.5%)-$0.1$0.07-$0.93$0.71 (-231.0%)
Humana$7,148.2$6,319.6.9 (13.1%)$183.0$302.4$1.09$1.78 (-38.8%)
UnitedHealth Group$20,156.0$18,679.0.9 (7.9%)$920.0$1,283.0$0.75$0.95 (-21.1%)
WellPoint$14,961.0$15,242.0.9 (-1.8%)$820.7$868.0$1.60$1.45 (10.3%)

Source: Health plans' Securities and Exchange Commission filings

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This article incorrectly listed financial results reported by health insurer Health Net. The story and accompanying chart should have said that Health Net brought in $3.8 billion in revenue and net earnings of $18.5 million, or 17 cents per share, for the quarter ending Sept. 30, 2008. The company reported revenue of $3.6 billion and a net loss of $103.8 million, or a 93-cent loss per share, in the third quarter of 2007. Health Net took one-time charges from investment losses and severance related to outsourcing in the third quarter of 2007. American Medical News regrets the error.

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