Corporate Research Group’s Weblog

There are always questions when a company’s chief financial officer suddenly quits or gets fired — especially when the company is in the middle of implementing a major strategy shift.  Cigna Corp. announced the departure of CFO Annmarie Hagan, naming company treasurer Thomas McCarthy as acting CFO.  Cigna took the unusual step of making public its entire separation and non-disclosure agreement with Hagan.  Two things stood out for me: 1. Hagan gets a lot of money — $1.4 million, plus bonus and long-term compensation payouts; 2. Neither Cigna or Hagan is admitting it violated “any law, rule, order, policy, procedure, or contract.”  Separately, Cigna reaffirmed its 2010 profit forecast.  The implication is clear: the company is going out of its way to show that all is well.  A company spokesman told me the departure was a “mutual decision” and wasn’t related to any malfeasance or disagreement with company strategy or policy.  For the most part, Wall Street seems to be buying the explanation.  Shares in Cigna are down just 0.3% in morning trading in a mixed market opening.

Truthfully, I was amazed that minimum medical cost ratio (MCR) requirements ever made it into the healthcare reform law.  Now that it’s in there, the definition of what does (and doesn’t) constitute a medical cost just keeps getting worse for managed care.

The big blow came earlier this month when six key Congressional Democrats including Sen. Max Baucus (D-MT) told HHS Secretary Sebelius that federal income and payroll taxes shouldn’t be excluded from premiums in calculating MCRs; instead, they say, the only exclusion should be for taxes related specifically to revenue derived from the provision of health insurance.

My friend Carl McDonald over at Citi revamped his analysis to reflect the impact of this interpretation: “Our estimate is that federal income taxes  account for between 150-200 basis points of the anticipated increase in reported MLRs. In other words, instead of raising reported MLRs by 500 basis points, it is now possible that the adjusted MLRs will increase by only 300-350 basis points, increasing the rebates that plans are required to return to customers next year.”

Bottom line: even lower profits for health plans in 2011 than originally anticipated. 

Of course, neither Sebelius nor the National Assn. of Insurance Commissions – which is drafting the MCR rules – is required to follow the Democrats’ interpretation of the legislation; the law simply reads that the denominator for calculating MCRs should be “the total amount of premium revenue (excluding Federal and State taxes and licensing or regulator fees).” 

Naturally, insurers are lobbying hard for the broader interpretation.  Extended coverage appears in the Aug. 23 issue of Carl Mercurio’s Health Plan Market Trends Letter.

 Here are the headlines from Carl Mercurio’s Health Plan Market Trends Letter for August 16, 2010.

• Boorady is Bullish on Managed Care Growth Prospects
• Health Net Provides 0% Bridge Loans to Community Clinics
• Independence Blue Cross to Sell PBM Unit to Catalyst
• AHIP Board Supports Ignagni
• CA HMOs Enjoy Profit Growth in 2009

No sooner did UnitedHealth announce plans to diversify further beyond its core medical insurance business than the company agreed to acquire Executive Health Resources (Newtown Square, PA), which helps hospitals with medical necessity compliance for Medicare and Medicaid patients.  EHR, with 1000 employees and more than 1100 hospital clients, will become part of United’s Ingenix division.

How far does the EHR transaction move the needle for United – which believes non-health insurance lines could eventually account for 30% to 40% of company operating earnings, up from 20% today?  “We have quiet some distance to travel to get up into that range.  One or two transactions won’t do it,” says Jon Penshorn, senior vice president of investor relations. 

Extended coverage appears in the Aug. 9 issue of Carl Mercurio’s Health Plan Market Trends Letter.

Somebody likes managed care stocks.  Charles Boorady of Credit Suisse has initiated coverage of the managed care sector with an “overweight” or “buy” rating.  He says investors should buy Coventry, Humana, UnitedHealth and WellPoint, with United being his top pick.  He rates as “hold” Amerigroup, Centene, Cigna, Health Net, Molina and Triple-S.  He has no “sell” ratings.  Notes Boorady, “Winners and losers will emerge in managed care. Winners will have access to public equity capital and invest strategically to offset margin compression by taking market share from 1,200 insurers that may not survive, low-cost to compete on price through exchanges, M&A track record; Medicare, Medicaid & HMO experience; and real-time HCIT capabilities to coordinate with physicians implementing electronic health records and ACOs.”

Here are the headlines from Carl Mercurio’s Health Plan Market Trends Letter for August 2, 2010.

• Evaluating the Aetna, CVS Caremark PBM Deal
• 2Q10 Health Plan Profits Soar 28%
• Medco Downgraded; CVS Caremark Sees Improvement
• A Tale of 2 Medical Homes Initiatives

I’m going to give Aetna the benefit of the doubt on its decision to hang onto its pharmacy benefit management unit while handing CVS Caremark a 12-year deal to administer drug benefits for 9.7 Aetna PBM members.  The goals: lower drug costs, lower overall medical costs through enhanced integration of medical and pharmacy programs, and ultimately more competitive premium rates.

But I don’t blame investors for being spooked at least initially, pushing Aetna shares down 3% on the announcement, while shares in CVS rose 3%.  (Aetna shares subsequently bounced back amidst a broad market rally). 

First, the arrangement is complex.  Aetna will continue to negotiate and retain rebates for drugs on its formulary.  CVS will handle fulfillment of mail order and specialty drugs from its own inventory, taking advantage of its bulk purchasing efficiencies.  CVS is also providing Aetna with pricing guarantees.

Aetna continues to own its PBM and both its mail-order and specialty pharmacies.  Aetna will also continue to handle clinical program development, sales and account management, pricing and underwriting, formulary management and clinical protocols.  CVS – in addition to mail order procurement and fulfillment – will handle network contracting, claims processing, customer service and member engagement.  Aetna will transfer 800 of its 1800 PBM employees to CVS.

How complex is the arrangement?  Aetna will take up to $50 million to $60 million in pretax charges — reflecting the cost of structuring a transaction in which it didn’t sell its PBM unit.

Extended coverage appears in the Aug. 2 issue of Carl Mercurio’s Health Plan Market Trends Letter.

Yet another major health plan hopes to grow revenues and profits through a new mix of products and services beyond the core medical insurance business.

UnitedHealth Group (Minnetonka, MN) said it hopes to expand its healthcare services businesses – adding that these non-health insurance lines could eventually account for 30% to 40% of company operating earnings, up from 20% today. 

United also announced the formation of an “emerging businesses group” led by Rick Jelinek, most recently CEO of United’s Medicaid business.  Jack Larsen takes over Medicaid, while Tom Paul becomes CEO of United’s Medicare business. 

I have to admit, Jelinek has landed a cool job — pulling together new product ideas from across the enterprise, identifying new business opportunities resulting from reform, and leading a kind-of entrepreneurial research and development arm. 

Extended coverage appears in the July 26 issue of Carl Mercurio’s Health Plan Market Trends Letter.

Newsflash: Leslie Margolin, president of WellPoint’s Blue Cross of California — the company that single-handedly saved the cause of healthcare reform by trying to hike premium rates at the most politically inopportune time — has resigned after two and a half years on the job.  WellPoint says the resignation had nothing to do with the rate dispute.  But it got me thinking about some of the stupid things managed care executives have done over the past 13 years (my tenure covering the industry).  Here are my top five dumbest acts in managed care.

1. UnitedHealth Stock Options Backdating Scandal: William McGuire, M.D., chairman and chief executive of UnitedHealth – who is widely considered the driving force behind the company’s rapid and successful rise to prominence – resigned in 2006 in the wake of a stock options backdating scandal that rocked the company.  An independent report commissioned by United’s board said that 1 million options granted to McGuire were probably backdated, along with millions of other options granted to thousands of employees.  The scandal made McGuire — whose options were worth about $1 billion — another poster boy for executive hubris and corporate greed.

2. Vogt Speech: Remember John O. Vogt, M.D.?  He was the Kaiser utilization management specialist who in 1995 made perhaps the dumbest speech in the history of managed care, stating that he and a colleague — while drinking bourbon and whiskey on a flight to Los Angeles — came up with a plan to reduce Kaiser’s medical costs in Texas by 30%.  Two years later, the speech surfaced as evidence in a wrongful death lawsuit in which the family of a Texas man claimed his death from a heart attack was related to the cost-cutting initiative.  Kaiser settled the suit for $5.4 million and subsequently exited the Texas market.  Vogt apologized for the speech, stating it ”was an attempt at livening up a very dry subject…Many times during the presentation, I made facetious comments and attempts at humor that were not true statements.”

3. Colby and the WellPoint ”Code of Conduct:”  David Colby – riding high as WellPoint chief financial officer and heir apparent to the CEO post — was forced to resign in 2007 for unspecified violations of the company’s code of conduct.  It later came to light that Colby was being sued by various women, who according the Associated Press depicted him as “a world-class, love-’em-and-leave-’em sort of guy who romanced dozens of women around the country simultaneously, made them extravagant promises and then went back on his word with all the compassion of a health insurance company denying a claim.  One woman says Colby got her pregnant and harangued her via text message (“ABORT!!”) to terminate the pregnancy. He also allegedly…proposed to at least 12 women since 2005.”  It’s hard to tell what’s true and what isn’t in these salacious claims, but as a general rule this type of behavior is bound to get you in trouble.

4. Tonik on The Daily Show:  Hard to imagine why WellPoint’s Blue Cross of California agreed to participate in an Ed Helms report in 2005 on Comedy Central’s The Daily Show about Tonik — a health plan aimed at young and uninsured individuals.  After all, the segment includes exchanges such as the following: 

WellPoint executive: “It’s not their parents’ health insurance plan.” 

Helms: “Their stupid health insurance covered everything.”

But then again, considering that Tonik went on to be one of WellPoint’s top-selling products, maybe this wasn’t such as dumb move after all.

5. WellPoint Trys to Raise Premiums in California up to 39%:  Finally, as mentioned above, WellPoint’s attempt to push through hefty rate hikes for individuals in California created a political firestorm that gave Obama’s faltering healthcare reform effort the boost it needed for final passage.  Rep. Michael Burgess (R-TX) summed things up in Congressional hearings on the proposed hikes when he asked WellPoint chief executive Angela Braly, “You had to know this was going to be trouble….Did you make a judgment as to whether this was the best time to do this?”

Blue Cross Blue Shield of North Carolina chief executive Brad Wilson issued a memo to employees last week titled “Our urgent need to change.”  He was referring to his company, but his thoughts apply to all health plans.

BCBS-NC will cut costs, diversify into new businesses and squeeze providers to remain “competitive and relevant.”  I expect similar soul-searching from other plans as the forces of healthcare reform, a hostile Administration, and a deteriorating commercial risk business hammer industry profits. 

“We are going to be a leaner, more focused company,” Wilson said.  Leaner?  Yes.  More focused?  No.  In fact, the company is committing to further diversification.  Semantics aside, other plans will follow this prescription.

 Extended coverage appears in the July 19 issue of Carl Mercurio’s Health Plan Market Trends Letter.

 Equity analyst Carl McDonald (who recently made the move from Oppenheimer to Citigroup) has initiated coverage on the managed care sector with “buy” ratings for Health Net, Triple-S and WellPoint – three companies with lots of cash and room for margin improvement.  He has rated as “hold” Aetna, Cigna, Coventry and UnitedHealth.  McDonald agrees that 2010 will be a very good year for plan profits.  But the problem isn’t 2010; it’s every year after.  Extended coverage appears in the July 12 issue of Carl Mercurio’s Health Plan Market Trends Letter.

From Deloitte’s 2010 Global Survey of Health Care Consumers:

Consumers in all countries identify academic medical centers and medical societies/associations (physicians) as their most trusted sources of information on the effectiveness and safety of treatments….Other sources of information such as government, health insurers, pharmacies, life sciences companies, independent health websites and other hospitals are consistently rated lower across the countries surveyed.

Aetna president Mark Bertolini  was a little late to our meeting last week on How Health Plans Can Survive Reform (Who knew there were two Millennium Hotels on 44th Street in Manhattan?), but his keynote address was worth the wait as he outlined a credible strategy for the health insurance industry going forward.   Bertolini outlined  five keys to surviving reform: 1. Payment reforms that shifts incentives from volume to outcomes; 2. Information technology that improves quality, lowers cost; 3. Wellness: engaging consumers with incentives and decision-support tools; 4. Transparency tools that provide information and improve accountability; 5. Revamped benefits and plan designs.

Extended coverage of his presentation appears in the July 4 issue of Carl Mercurio’s Health Plan Market Trends Letter.

Below are some highlights from KPMG’s 2010 Managed Care Industry Report:

• In 2009, the largest health insurers in the U.S had combined profits of US$14.4 billion, an increase of 56 percent over 2008, even though the industry lost 2.7 million members who had health insurance the year before.
• However, these companies are not expected to repeat their performance in 2010. The expected high unemployment rate in 2010 may further erode insurers’ highest margin and commercial membership, which declined by 2.3 percent among publicly traded insurers in 2009.
• The U.S. health insurance market is expected to grow 7 percent annually from 2009 to 2011. However, with the implementation of reform, health insurers will face pressure to maintain profitability. Expect to see premium increases, job cuts, administrative cost reductions, and increased M&A activity.

Here’s a telling graph showing the cumulative ramp-up in physicians involved in mergers and acquisitions from 2007 through March 2010.  The chart is from PricewaterhouseCoopers’ medical cost trends report based on data from Irving Levin Assoc.  Notes PWC:

Payers expect to see more negotiating power and higher prices from larger physician groups who are working in tandem with hospital systems. Eventually, consolidation is expected to produce increases in efficiencies for providers that may be passed along to payers in lower or moderated rates.

UBS analyst Justin Lake commenting on the meeting set for later today between President Obama and managed care executives:

Managed Care Remains The Go To Enemy For The Democrats Even If Both Sides Do Supposedly Need Each Other: It’s All About The Rate Hikes. The new health care reform law [Affordable Care Act (ACA)] and its implementation has gotten lost in the recent headline mix of the BP Gulf oil spill and the reemerging Afghanistan War, but promoting the 2010/2011 benefits of the ACA remains a major priority of the Obama Administration, along with trashing the health insurance sector when it makes political sense.

Here are the headlines from Carl Mercurio’s Health Plan Market Trends Letter for June 21, 2010.

• HSA Concept Falls Short on Key Metric
• HSA Plans: Four Levels of Consumer Involvement
• 28% of HSA Transactions Are in Drug Stores, J.P. Morgan Says 
• How OptumHealth Stacks Up
• Top MCOs Have 12.7 Million HSA, HRA Lives
• Leading Banks Have $5.3 Billion in HSA Assets

Here are the headlines from Carl Mercurio’s Health Plan Market Trends Letter for June 14, 2010.

• Walgreens Dumps Caremark; Everybody Loses
• AHIP Annual Convention: Bustling, Upbeat, Vaguely Rudderless
• 1Q10 MCO Membership Falls 0.8% to 123.3 Million 
• 1Q10 Commercial PPO Enrollment Declines 4.8%
• 1Q10 HMO/POS Lives Decline 2.2% to 65.3 Million
• 1Q10 BCBS Lives Decline 5.6% to 24.5 Million
• S&P Still Negative on Health Insurance Industry

I’m off to the AHIP annual meeting in Las Vegas.  Will report back.

Here are the headlines from Carl Mercurio’s Health Plan Market Trends Letter for June 7, 2010.

• Open Season on Health Plans Part III – BCBS-VT Agrees to Refunds
• What’s Worrying States re. Healthcare Reform
• Medicaid Expansion a Mixed Bag for States
• Politics of Reform are Far From Over
• What Happens When High-Risk Pools Run Dry?
• Some Clarification on Covering 26-Year-Old ‘Dependents’
• My Theory vs. Reality of Disease Management Programs