Health plans' huge earnings spark fallout from politicians
■ Insurers, however, plan to stick with their strategy of maximizing rates while minimizing costs.
By Emily Berry — Posted Aug. 16, 2010
Health insurance executives say that, despite political backlash toward their profits and pricing, they will continue to push medical spending lower and keep premiums at the greatest possible margin above costs.
The statements came as the seven largest publicly traded health insurers generally reported second-quarter profits above analysts' expectations.
The plans credited lower health spending, in large part due to money set aside for a flu epidemic that wasn't as bad as expected, and in part because even insured patients were spending less on health care. The plans also credited their own "pricing discipline" -- keeping premiums as high as possible, even at the risk of losing members and standing with politicians.
During a second-quarter earnings conference call between UnitedHealth Group executives and investment analysts, Citigroup's Carl McDonald asked if the company was bracing for more resistance to rate increases and "pricing to trend" -- setting premiums higher as medical costs rise, allowing for consistent or even growing profit margins.
Given the political environment and the company's historic profit margins, which he cited at 7%, McDonald wondered if UnitedHealth Group could keep up those price increases. United said, yes it can.
"I think that you can still price to trend. I think that is the appropriate long-term positioning of the organization," CEO Stephen Hemsley said.
Five of the seven largest shareholder-owned health plans -- Aetna, Health Net, Humana, UnitedHealth Group and WellPoint -- reported profits in the second quarter of 2010 better than the same period in 2009.
But all seven companies raised their estimates of the total profit they will bring in for the full year.
Net income for the quarter ranged from $1 million for Coventry Health Care to $1.1 billion for UnitedHealth Group. Coventry was charged $278 million for a class-action lawsuit settlement regarding its workers' compensation business in Louisiana.
United's per-share profit of 99 cents was up 37% from the same quarter in 2009, but that wasn't even the largest increase among the biggest seven insurers. Aetna reported earnings of $491 million, or $1.14 per share, a 48% jump, Humana and WellPoint reported a 20% jump in per-share earnings compared with the second quarter of 2009. Coventry earnings would have been up without the settlement.
Cigna's health insurance business did better than expected, but the company saw earnings drop because of losses in nonhealth business.
Most of the big health plans lost members and brought in lower revenue than the prior year but were still able to make a profit because of lower medical spending. For several insurers, a milder-than-anticipated flu season made a critical difference to earnings, allowing them to count as revenue money that had been set aside, but not spent, for the influenza A(H1N1) pandemic. For some plans, such as WellPoint, that turned around what would have been a profit decline from the second quarter of 2009.
Insurers also credited their care management programs and continued economic pressure that appeared to keep members from spending on care.
However, the debate over rates and the potential for further backlash as new health system rules take shape tempered investors' response to health plan earnings.
U.S. Reps. Pete Stark (D, Calif.) and Jan Schakowsky (D, Ill.) released separate statements demanding that insurers lower premiums in light of recent rate increases. They are co-sponsors of legislation, introduced July 22, that would establish a public health insurance option to be included in health insurance exchanges created by health system reform.
Schakowsky said the "windfall" quarterly profits "are the umpteenth example of why this industry needs to be checked."
Coventry and Cigna were the only plans Stark didn't mention by name in multiple releases chiding health plans. He put out a release July 28 slamming WellPoint, Aetna and UnitedHealth Group, then followed up with statements on Humana's Aug. 2 earnings report and Health Net's Aug. 3 earnings report.
"Last week we found that WellPoint and Aetna were reaping hundreds of millions more in profits while spending hundreds of millions less on health care," Stark said in the Aug. 2 release.
"Today's report shows another insurer having a banner year. I await announcements by Humana and other insurers that they will be passing along these billions to consumers in the form of lower premiums."
That doesn't appear to be in the cards. Angela Braly, WellPoint's CEO, president and chair, said during her company's quarterly conference call that she's confident her company will be able to get future rate increases approved despite resistance in some states in 2009 and 2010 -- most famously, in California, where a proposed 39% maximum increase for individual plans was credited with relighting the fire to get health system reform passed.
"We expect that over time, appropriate rates will be granted in order to sustain this important market segment for the many Americans it will serve," Braly said. "This market is projected to expand by 16 million people during the next decade as a result of health care reform, and creating a fundamentally sustainable marketplace will be critical."
The American Medical Association was critical of health plans after the release of the earnings reports, citing numbers that show rate hikes outpacing health spending overall and physician services in particular.
"Huge premium hikes and windfall earnings from the health insurance industry are out of step with the latest figures showing the slowest rate of growth in U.S. health care spending in nearly 50 years," said AMA Immediate Past President J. James Rohack, MD. "Spending for physician and clinical services grew 5%, the slowest rate of growth since 1996.
"While insurers propose double-digit price increases, the latest figures show prices for physician services increased by only 2.7%. In fact, inflation adjusted physician fees decreased by 25% between 1996 and 2006. More oversight is needed to make certain that insurers are not funding their multibillion-dollar merger and acquisition strategies on the backs of patients, physicians and employers."