Answer: Probably not too well.
Now that Jon Stewart of the Daily Show has (quite fairly) stuck it to CNBC and Mad Money host Jim Cramer for among other things failing to predict the market implosion (see video here), I’ve been doing a little soul-searching myself.
The team here at CRG (i.e., mostly me) had projected that managed care profits would rise about 20% in 2008. Instead, they fell off a cliff. There were indeed signs that a downturn was overdue, as I pointed out in a 2007 opinion piece (see below).
Countering these signs, state insurance department data continued to show strong profit growth among HMOs. Furthermore, our annual nationwide survey of employers and health plans showed that premium rate increases were steady and mirrored historical cost trends.
Only higher-than-expected increases in medical costs coupled with some poor forecasting on the part of health plans could turn things sour. Throw in investment losses tied to falling markets and some other unexpected blow-ups….well, you get the idea.
Bottom line: There was enough evidence to suggest managed care plans would have another good year and enough to suggest as I did in my 2007 opinion piece that there were concerns.
Too bad I went with ”another good year” of 20% profit growth. ”I coulda been a contender, instead of a bum, which is what I am!”
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When Is a Trend a Trend? Thoughts on the Insurance Cycle
by Carl Mercurio (Originally published, May 3, 2007)
The 2007 managed care earnings season officially began on April 17 when UnitedHealth Group (Minnetonka, MN) released first-quarter financial results. Since then, managed care stocks are down 5.5%.
The only winners over the period from April 17-May 1 were Aetna Inc. (Hartford, CT) and Cigna Corp. (Philadelphia), two companies with something in common. Both reported declines in medical costs as a percentage of premiums (i.e., medical cost ratio) for the first quarter. That means premiums generally speaking rose faster than medical costs—the single most important measure of a health plan’s financial success.
With the exception of shares in Sierra Health Services (Las Vegas, NV), which were flat, shares in all the other major managed care plans are down since April 17. Shares in Medicaid plans like Amerigroup Corp. (Virginia Beach, VA), Centene Corp. (St. Louis, MO) and Molina Healthcare (Long Beach, CA) were the hardest hit, but the fallout included industry giants UnitedHealth and WellPoint Inc. (Indianapolis) as well.
And in most cases the culprit was an unexpectedly high medical cost ratio. It’s a pretty safe bet that a rising medical cost ratio—short of a change in business mix or other factors that explain the increase—will put a damper on a health plan’s stock. When the increase is unexpected, Wall Street freaks.
The $64,000 question is whether the recent MCR run-ups are limited to company-specific issues, or whether they indicate an industry-wide increase in the price and/or utilization of medical services. The former means the problem is isolated—a one-time or short-term aberration. The later means the entire health insurance industry may be sucking wind.
Ebbs and flows in industry-wide MCRs used to be called the insurance or underwriting cycle. Prices rise to cover costs (an up cycle) and then fall as plans price to win share (a down cycle). The concept has fallen out of favor. Industry executives and Wall Street analysts have declared the underwriting cycle dead. One of my favorite analysts—and a hell of a good writer—Carl McDonald of CIBC postulates the following:
“Mountains of evidence suggest managed care is a cyclical business, with regular patterns of rising and falling margins….The historical evidence looks indisputable, but the question remains: will it be this way going forward? Is there still an underwriting cycle? We think the answer is no.”
He goes onto the say that health plans will still have ups and downs. But the ups and downs will be less pronounced because health plans have a better handle on cost trends then ever before (technology has speeded up reporting) enabling plans to adjust prices more quickly than before.
I admit that I’ve never been much of a visionary. I tend to look at history as a predictor the future. If the price-to-earnings ratio of the stock market is above historical averages, I look for stock prices to fall. If Yankee shortstop Derek Jeter has a high batting average against a particular pitcher, I expect him to get a hit when he faces that pitcher.
In short, I’m not ready to declare the insurance cycle dead. I’ll agree, however, that future cycles will likely be less pronounced. So if McDonald and I disagree, it may more semantics than substance—which is another way of saying we’re both hedging.
Meanwhile, here’s a look at some of the first-quarter MCR troubles of top health plans, along with the various explanations of plan executives. You be the judge if the worm is turning.
*Stephen Hemsley, chief executive of UnitedHealth Group (Minnetonka, MN), basically admitted the company got sloppy in its forecasting of medical costs—failing to adequately project the prices it would have to pay for out-of-network medical services and guessing wrong on cost trends for high-deductible and consumer-directed products. United officials said HDHP/CDHP costs tend to soar in December when members rush to get treatment before the deductible resets for the next year. Why this should suddenly be news to a company that has been a big player in the consumer-directed market for some time wasn’t clear.
*David Colby, chief financial officer of WellPoint Inc. (Indianapolis) said the company was waiting for a Medicaid reimbursement rate hike that never came—resulting in “unacceptably high” Medicaid MCRs in two states. One of the states was California, where the company is negotiating for higher reimbursements. The company has also initiated other cost-control efforts, including recontracting with labs, reducing physician fees, closing drug formularies, and restructuring hospital networks.
*The red flag raised by WellPoint over Medicaid MCRs put the spotlight on Medicaid health plans in general—pushing down shares in Amerigroup, Centene and Molina. Amerigroup said medical costs in Georgia were higher than expected, driven by dental, drug and in some case in-patient expenses. Centene also reported higher-than-expected physician costs in Georgia. Molina saw its stock bounce back after it reported no first-quarter MCR problems.
*By the time Humana Inc. (Louisville, KY) reported an increase in first quarter 2007 MCR, the market was already sufficiently spooked to drive down the company’s stock—despite the fact that Humana reported better-than-expected profits. Wall Street analysts estimate that Humana’s Medicare Advantage product line alone drove the increase in MCR. Shares in Humana are also susceptible to investor concerns that Congress will scale back Medicare HMO payments.
*And finally, Health Net (Woodland Hills, CA) saw its shares fall 5% on April 30 and then bounce back somewhat the next day as investors tried to make sense of the company’s prospects after it reported solid but hardly spectacular first-quarter results. Medical cost ratio was up—but mostly that was expected. And while I couldn’t help but note that commercial medical costs were rising slightly faster than premium yields, the company said yields would end up topping cost trends for the year.
So what’s the bottom line? Remember Aetna, which took it on a chin a year ago when costs got ahead of premiums. The company said at the time that the shortfall was related to a few specific accounts and that all had been fixed. Judging by first-quarter 2007 results, Aetna was right. So there’s a good chance that all the MCR woes mentioned above are also one-time blips. There’s a good chance all is being corrected as we speak. There’s a good chance all is well. And a cycle runs through it.
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