Health plans adjust strategies to economic downturn

Insurers whose profits are declining are trying to find business where laid-off employees have been shifted, including Medicaid and individual insurance.

By — Posted Feb. 23, 2009

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The current recession hasn't changed investors' expectation that health plans grow profits -- even though that was not the reality in 2008.

So as plans announced their earnings were sliding, in part because of corporate layoffs that cut the number of members buying coverage, they also said they would step up efforts in products that those members were potentially turning to for insurance -- Medicaid and individual coverage.

All of the seven largest publicly traded health plans saw their earnings slide last year, with particularly steep declines in the final quarter, when unemployment accelerated, cutting down plans' group business. Plans in January and February reported 2008 earnings to the Securities and Exchange Commission.

Full year per-share earnings dropped by 14% for WellPoint, which saw the most modest drop among the seven, and by 48% at Health Net, with most of the other companies falling in between. Cigna saw an unusually steep drop in profits, mostly due to losses in life insurance and retirement policies it no longer sells but continues to operate. As a result, its profits for the year were 72% lower than in 2007.

The plans said such business could make up for losses in income from expected congressional efforts to put Medicare Advantage plan payments even with Medicare itself, rather than at a premium that has usually exceeded 10%.

Fourth-quarter profits were down dramatically from 2007: Humana's per-share earnings were down 28% compared with the last quarter of 2007, and it had the smallest decline among the seven.

Despite those results, executives tried to make the case for their own long-term success by emphasizing how they are taking advantage of the weak economy and planning for future health system reform.

"If you're in [a government program] you're trying to expand it; if you're not in one you're trying to be a player," said Merit Smith, vice president and health care practice director for consulting firm Robert E. Nolan Inc. "If I'm already in there, like WellPoint is, they're going to talk it up, they're going to increase their street cred."

And they are talking it up: Brian Sassi, president and CEO of the consumer business unit at WellPoint, told analysts on a recent conference call that the company is trying to keep the newly unemployed as WellPoint members. That might be through an extension of coverage under COBRA -- which looks likely to be the target of federal subsidies -- through individual coverage, or as Medicaid enrollees, with WellPoint administering the benefits.

"We are going to be very focused as the economy continues to turn," Sassi said.

WellPoint has reason to plan for the erosion of its base commercial business: of 116 major corporate layoffs in 2008, WellPoint was "affected" -- defined as having lost members -- in 52 instances, said Ken Goulet, executive vice president and CEO of WellPoint's commercial business unit.

Other health plans already in the managed Medicaid field are touting those lines of business to investors, promising that despite state budget constraints, running Medicaid programs is a good way to make money in the midst of the recession.

Aetna bought the Phoenix-based consulting firm Schaller Anderson for $535 million in 2007 as a way to instantly win Medicaid business, and in 2008 won a contract to run Connecticut's Medicaid program.

UnitedHealth Group, meanwhile, added 800,000 new Medicaid members to its AmeriChoice division in 2008, growth that exceeded the company's expectations, and that President and CEO Stephen Hemsley said could continue, given the unemployment rate rising.

Focusing on Medicaid in light of rising unemployment could be smart business, not just wishful thinking on the health plans' part, according to managed care investment analyst Matthew Borsch, of Goldman Sachs. He released a research report Feb. 3 highlighting the money to be made by running Medicaid programs.

Medicaid is also being explored by health plans as a way of positioning themselves to be ready for national health system reform.

The other common strategy is establishing a sales network and customer base for individual insurance, in case the government establishes an individual health insurance mandate or subsidies to pay for health insurance.

Aetna has pushed hard in selling individual health insurance policies -- it boosted its individual membership by nearly 30% in 2008, Chair and CEO Ron Williams said in a presentation to investors in January.

Another changing reality for health plans is the way they expect to succeed in the Medicare program, given President Obama's past criticism of the Medicare Advantage system as structured during the Bush administration.

"I think 2009 is also a very big year in terms of getting clarity around the long-term nature of the Medicare Advantage program as we play through the politics and the decisions that have to be made around how the private sector is going to play here in the Medicare space," said Humana President and CEO Mike McCallister. "I'm very comfortable that at the end of the day we have a wonderful opportunity. The government does need us."

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A new financial reality

The country's largest publicly traded health plans ended 2008 with profits often far below 2007 earnings. Health plan executives emphasize adjustments in 2009 to take advantage of a marketplace with higher unemployment and higher Medicaid enrollment, while keeping an eye toward national health system reform. Except for earnings per share, all dollar figures are in millions.

The financial results for fiscal years 2007 and 2008:

RevenueNet incomeEarnings per share
Aetna$27,600$30,951 (12.1%)$1,831$1,384$3.47$2.83 (-18.4%)
Cigna$17,623$19,101 (8.4%)$1,115$292$3.87$1.05 (-72.9%)
Coventry$9,880 $11,914 (20.6%)$626$382$3.98$2.54 (-36.2%)
Health Net$14,108$15,367 (8.9%)$194$95$1.70$0.88 (-48.2%)
Humana$25,290$28,946 (14.5%)$834$647$4.91$3.83 (-22.0%)
UnitedHealth Group$75,431$81,186 (7.6%)$4,654$2,977$3.42$2.40 (-29.8%)
WellPoint$61,168$61,251 (0.1%)$3,345$2,491$5.56$4.76 (-14.4%)

Source: Health plan filings with the Securities and Exchange Commission

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Slowing profits

The last three months of 2008 largely confirmed a long-term trend of lower earnings for many of the large publicly traded health plans. This trend is most striking when compared with the same period in 2007. Except for earnings per share, all dollar figures are in millions.

Fourth-quarter results:

RevenueNet incomeEarnings per share
Aetna$7,144$7,759 (8.6%)$448$195$0.87$0.42 (-51.7%)
Cigna$4,455$4,817 (8.1%)$263-$209$0.93-$0.77 (-182.8%)
Coventry$2,788$3,020 (8.3%)$184$88$1.18$0.60 (-49.2%)
Health Net$3,583$3,869 (8.0%)$117$36$1.04$0.34 (-67.3%)
Humana$6,339$7,488 (18.1%)$243$174$1.43$1.03 (-28.0%)
UnitedHealth Group$18,705$20,454 (9.4%)$1,216$726$0.92$0.60 (-34.8%)
WellPoint$15,570$15,070 (-3.2%)$859$331$1.51$0.65 (-57.0%)

Source: Health plan filings with the Securities and Exchange Commission

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