Corporate Research Group’s Weblog

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.

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.

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.

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.

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.