Shares in Cigna are down 20% in midday trading today (and have fallen 72% from their 52-week high) after the company announced a 53% decline in third-quarter net income and a reduction in full-year 2008 earnings outlook. The decline was entirely related to losses in the company’s run-off reinsurance business. Membership, meanwhile, is expected to fall 1% in 2008 and another 2% in 2009. What’s it all add up to? Cigna is now the third worse performing managed care stock among 13 issues tracked by CRG, beating out only Health Net (down 77% from its 52-week high) and Coventry (down 80%). To which we can only say, “Ouch!”
What else can we say about Aetna’s disappointing third-quarter 2008 earnings release that we didn’t already say about the managed care industry at large in our post on Monday titled Searching for Hope in 3Q08 Managed Care Financials. Aetna’s earnings fell because of asset writedowns associated with investment losses, medical cost ratio rose, and the company disappointed analysts with lower-than-expected 2009 earnings projections. The company said its “core business performance remains solid,” and we’re hoping that’s not analogous to John McCain’s statement that “the fundamentals of our economy are strong.” Aetna’s shares fell 8% today and are down 57% from their 52-week high. The truth is that Aetna is probably all right, but like the rest of the industry, a lot will hinge on whether premium yields keep pace with cost trends next year. Of course, that’s not exactly news to anyone.
An editorial in today’s New York Times does a good job of explaining the pros and cons of the competing universal healthcare proposals from Obama and McCain. The Times concludes: “Mr. Obama’s plan is the better one because it would cover far more of the uninsured, spread risks and costs more equitably and result in more comprehensive coverage for most Americans. We fear Mr. McCain’s plan would jeopardize employer-based coverage without providing an adequate substitute. At a time when so many employers are reducing or dropping coverage, that is not a risk that the country can afford to take.”
The Kiplinger Letter reports in its Oct. 24 issue, “Mounting medical debt, likely to boost bankruptcies. The number of people who are paying for health care with credit cards is on the rise. Moreover, recession is sure to mean more people without health care insurance….Even the insured will feel the strain, postponing services that aren’t urgent and skipping medications to hold down out-of-pocket expenses.”
Some of the nation’s top managed care plans have released their third-quarter 2008 financials, and we’re looking for signs of hope amid the carnage of recent memory.
WellPoint said third-quarter net income declined; however, the company is projecting a “single-digit” increase in earnings in 2009. Coventry got whacked, reporting a 49% decline in third-quarter profits; the company said it won’t fully bounce back until 2010. UnitedHealth’s third-quarter 2008 earnings fell 28%; however, the company expects improvement in 2009.
Industry-wide improvement in 2009 hinges largely on a simple outcome, i.e., that premium rate increases keep pace with costs. We’re not allowed to use the words “insurance cycle” or imply that a down “insurance cycle” has negatively affected profitability among health plans. Except for the fact that costs in some cases have run ahead of premiums, squeezing profit margins, and hammering stock prices—all the things that point to a down cycle—we’re not supposed to admit that an “insurance cycle” even exists.
By extension, therefore, we’re not supposed to suggest that the “insurance cycle” will turn favorable again in 2009 and beyond. Therefore we won’t say the “insurance cycle” is going to turn favorable in 2009, which is a good thing because we’re not actually sure the “insurance cycle” will turn favorable in 2009 even if an “insurance cycle” existed, which it doesn’t.
Our uncertainty stems from premium projections for 2009 that look pretty similar to 2008, continued commercial competition, and the feeling that very real drop-offs in utilization because of the down economy probably won’t be a big enough offset next year. We’re looking more toward 2010 for a turnaround, barring any big policy changes coming out of a new Administration in Washington and assuming there is such a thing as an “insurance cycle,” which of course, there isn’t.
Here’s an example of the type of consumerism we don’t want in healthcare. From an article in last week’s New York Times titled “In Sour Economy, Some Scale Back on Medications.”
“‘People are having to choose between gas, meals and medication,’ said Dr. James King, the chairman of the American Academy of Family Physicians, a national professional group. He also runs his own family practice in rural Selmer, Tenn. ‘I’ve seen patients today who said they stopped taking their Lipitor, their cholesterol-lowering medicine, because they can’t afford it….I have patients who have stopped taking their osteoporosis medication.’”
Barack Obama reiterated his views on Medicare HMOs in last night’s debate: “We spend $15 billion a year in subsidies to insurance companies under the Medicare plan. It doesn’t help seniors get any better. It’s not improving our healthcare system. It’s just a give away.” The Obama platform on Medicare HMOs (here) states that these “excessive subsidies…create an incentive structure that has led to fraudulent abuses of seniors” and calls for their elimination.
Couple this statement with Obama’s universal healthcare proposal to offer a public plan similar to what’s offered to federal employees, and you’ve got the makings of a big political battle with the health insurance industry.
But assuming Obama wins (and I think he will) and assuming the Democrats expand their majority in Congress (and I think they will), this is a battle the health insurance industry just might lose. And that’s going to affect the profitability of Medicare Advantage plans. How much? Not as much as you might thing, say some observers. We will, however, be keeping our eyes on whether we see the type of large-scale pullbacks by Medicare HMOs that we saw about a decade ago.
The nation’s largest health plan WellPoint Inc. (Indianapolis) is teaming up with the X Prize Foundation to sponsor a $10 million contest on who can come up with the best ideas to address the nation’s healthcare crisis. Primary funding will come from the WellPoint Foundation. WellPoint has agreed to test finalists’ proposals in a real-world setting, which would seem to preclude the elimination of the health insurance industry and the institution of a single-payer government system as a winning solution. O.K., that’s a little snide. Maybe someone in a garage has some workable solutions. So why not? Guidelines are still being worked out, but it looks like the emphasis will be on healthcare transparancy, affordability, access and quality.
The Kiplinger Letter is in agreement with us and other analysts that budgetary constraints will make meaningful healthcare reform a battle for the next President. Writes The Kiplinger Letter in its Oct. 10, 2008 issue: “Incremental steps are the most any health care reformer can hope for in the next few years. Obama acknowledged as much in the second debate, but it would be even truer for McCain because of the Democratic Congress.”
WorldPublicOpinion.org released the results of a survey showing a “broad consensus among Americans that the government is responsible for ensuring that its citizens can meet their basic healthcare, food, and education needs.” If this keeps up, pretty soon we’ll be beating swords into ploughshares.
We cling as much as possible to the reassuring notion that healthcare stocks are a good defensive play in a bear market. It’s just that the numbers aren’t always on our side. As of Friday, the CRG Healthcare 100 Stock Index was down 44% from its 52-week high. That’s worse that the Dow Industrials (-39%), Nasdaq Composite (-43%) and Standand & Poor’s 500 (-43%). The CRG 100 includes large cap healthcare stocks as well as a variety of small cap growth issues such as healthcare information technology stocks. Another measure, the Standard & Poor’s Healthcare Index, tells a somewhat different story. It’s still down 31% from its 52-week high, but it has outperformed the broader market.
If you’re thinking of trying to pick individual healthcare stocks instead of a healthcare stock index, things are even trickier. The biggest losers are a mixed bag of companies including lasik surgery provider LCA-Vision, drugstore chain Rite-Aid, wellness and disease management company Healthways, assisted living facilities operator Sunrise Senior Living, health plan WellCare, e-prescribing technology company Zix, and online healthcare information publisher WebMD. Not far behind are industry giants like UnitedHealth, WellPoint, Cigna, Merck, Schering-Plough, and Boston Scientific. Investments in any of the above would have you down anywhere from 50% to 91%.
It’s seems logical that managed care companies—which have huge portfolios of investments—are likely to take some big writeoffs of unrealized losses in the third quarter. Not so, says analyst Carl McDonald of Oppenheimer. He also notes that the average plan has a pretty good-sized cushion and can write off nearly 20% of investments without having to raise additional capital.
“There will be realized losses in the third quarter, and we’re likely to see unrealized losses increase as well, as the equity markets were down, and spreads have widened. That said, at most plans, the vast majority of investments are held in government-protected assets, like Treasuries, mortgage-backed securities from Fannie & Freddie, which are safe, and municipal bonds,” McDonald says in a note.
McDonald adds, “Our analysis of state regulatory filings shows that managed care plans at the end of 2007 had $39.4 billion in capital, compared with required capital of about $18.5 billion, an RBC ratio of 532%. In total, the group could write off over $18 billion of assets, amounting to 18% of the industry’s cash and investments, reducing capital to 250% RBC. UnitedHealth is the best capitalized company in the group, as it could sustain a write-off of more than 32% of its statutory capital base. Universal American, Humana, and Molina are also well capitalized, with a cushion above 20% of investments….The least well capitalized companies in the group include Amerigroup, WellCare, and HealthSpring, as these plans could afford to write off 6-8% of assets.”
If you can’t make money at it, the free market isn’t going to provide it. And therein lies an important challenge for healthcare. An analysis by Avalere Health (Washington) shows that the number of stand-alone Prescription Drug Plans qualified to serve low-income Medicare beneficiaries (i.e., dual eligible Medicare/Medicaid members) in 2009 will fall to just 308, a decline of nearly 200 from this year. That means some 1.2 million low-income PDP members will be reassigned because their current plan is no longer available.
“Pursuit of the dual eligible is now a matter of business strategy for insurers—with some expanding and some diminishing their service to low-income beneficiaries in 2009,” said Bonnie Washington, vice president of Avalere Health. “The fundamental question for Medicare is whether low-income beneficiaries [end] up in plans that do not fully meet their medical needs—especially given the fact that their choices are limited in many states,” she said. In addition to PDPs, members can also choose a Medicare Advantage plan with drug coverage.
According to Avalere, six states will have five or fewer PDPs in 2009—Arizona, Florida, Hawaii, Maine, Nevada and New Hampshire. Nevada has the fewest choices: one. Wisconsin has the most: 16.
That’s what at least one analyst over at London-based Datamonitor thinks. “Pharma is cash rich and has not taken on significant debt,” said Chris Phelps, head of company analysis for Datamonitor in a press release. “As a result, the credit crunch will actually play out as a net positive for an industry much in need of good news,” he said. As for biotech, Phelps said, “the outlook is far from positive.” Biotech will be increasingly forced to look to big pharma for funding, and that will shift the balance of power in big pharma’s favor, he said.
SeekingAlpha has published a chart of 10 healthcare “value” stocks, and managed care organizations UnitedHealth, WellPoint and Aetna top the list. SeekingAlpha defines a “value” stock as one with a price-to-earnings ratio of less than 10 and a price-to-book-value ratio of less than five.
According to SeekingAlpha’s analysis, United has a P/E of 7.5 and a P/BV of 1.4, WellPoint has a P/E of 7.7 and a P/BV of one, and Aetna has a P/E of 9.3 and a P/BV of 1.6. Other healthcare companies on the list are Novartis, AstraZeneca, Eli Lilly, Wyeth, Sanofi-Aventis, Merck and Pfizer.
We’ll be back tomorrow with new posts.
The Federal investigation into WellCare’s Florida Medicaid operations has hung over the company for nearly a year. Perhaps there’s some light at the end of the tunnel.
Former WellCare employee Gregory West has pled guilty to conspiracy to defraud the Florida Medicaid program, according to Justice Dept. documents released yesterday. He faces up to 10 years in prison and a $250,000 fine. Plus, West has agreed to help finger others involved in the conspiracy in hopes of leniency in sentencing.
Specifically, West admitted that he participated in a conspiracy to falsely inflate behavioral health expenditures covered by the Florida Medicaid program. The fraud resulting in more than $20 million in excess funds for WellCare from 2002 to 2006, the documents said; West’s participation began in 2004.
The guilty plea, which was entered into in December, and the $20 million figure appear to limit WellCare’s overall exposure to the investigation. That’s been a big question for industry observers attempting to assess how damaging this whole investigation would be to the company.
It’s another bloodbath on Wall Street, with the Dow industrials dropping below 10,000 for the first time in four years. I can count on one hand the number of stocks in the CRG Healthcare 100 index that are up this morning. ImClone is up after announcing a deal to be acquired by Eli Lilly. Other winners include online weight loss program provider eDiets, long-term senior care facilities operator National HealthCare Corp., and Medicare health plan Universal American.
We predict that the biggest battleground will be over Obama’s universal healthcare initiative, which calls for “a National Health Insurance Exchange with a range of private insurance options as well as a new public plan based on benefits available to members of Congress that will allow individuals and small businesses to buy affordable health coverage.”
Specifically, it’s the “new public plan” part that will generate the most heated debate, with free market advocates likely to line up against any expansion of the current Medicare system. But there will also be plenty of talk about whether we can afford any major healthcare reform, given the nation’s eroding balance sheet. The truth is that acting on healthcare reform will be a very expensive proposition. Failure to act could cost us even more.
Drugs to treat rare and often costly diseases have been among the biggest breakthroughs in the biotech and pharmaceutical field. In this video interview, Leonard Bell, M.D., chief executive of Alexion Pharmaceuticals, discusses the market potential for Soliris, which treats a rare blood disorder called paroxysmal nocturnal hemoglobinuria (PNH).
Maybe we need a hobby, but we can’t help following the ups and downs of neonatal intensive care provider Pediatrix—the last reminder of our days covering the now-defunct physician practice management industry.
Shares are down 30% this year, the most recent falloff coming this week after the company lowered its earnings projections because of falling neonatal intensive care patient volume and a shift in reimbursement mix from commercial to lower-paying government payers.
What’s interesting is that last month, we reported on an initiative by UnitedHealth that has dramatically reduced NICU admissions in its southwest market. Is there a correlation between payer NICU efforts and falling volume? Pediatrix officials say no, blaming the shortfall instead on a decline in births in the hospitals in which it operates. NICU admissions as a percentage of births remain steady, officials said.
So what can we conclude from all this? A struggling economy is pushing more people into Medcaid, and we’re not making much progress in preventing NICU admissions? Maybe. But we’re not alone in wondering whether payers really are starting to make some progress in NICU admissions prevention?
Pediatrix’ bottom line aside, we hope it’s the latter.
Too bad our video interview with Martin Mackay, president of Pfizer Global Research & Development, was a week before the company announced a major overhaul of its drug pipeline (press release). Still, you might be interested to hear some of Mackay’s comments on the future of pharma drug development and the strength of the Pfizer pipeline (video here).
A battle with a 24-hour bug has us sidelined today. We’ll be back tomorrow. Don’t worry, we’re covered.