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BusinessWeek has a long and interesting article titled “The Health Insurers Have Already Won” on lobbying efforts by UnitedHealth Group aimed at ensuring that healthcare reform boosts industry profits in general (and UnitedHealth profits in particular).

One paragraph in particular stood out:

What people in Washington tend not to discuss, at least on the record, is the open secret that insurers are minimizing their forecasts of the eventual windfall they will enjoy from expanded coverage for Americans. UnitedHealth has given certain key members of Congress details about its finances and tax liability — both historical numbers and figures projected under various cost-sharing scenarios. But some on Capitol Hill are skeptical. “The bottom line,” says an aide to the Senate Finance Committee, “is that health reform would lead to increased revenues and profits (for the insurance industry).

I certainly wouldn’t put it past the health insurance industry to play games with the numbers.  But the BusinessWeek assertion sounded inaccurate to me (and I’m a supporter of reform and a public option).  So I asked the ever-diligent Carl McDonald of Oppenheimer if he agreed.  Here’s what he said.

The very rough analysis that I’ve done suggests that if individual and small group margins were cut in half (say from 8% to 4%) because of the creation of a health insurance exchange, it would cost the industry about $10 billion in earnings.

Adding 20 million new people to the commercial insured pool (remember, 10 million of the uninsured get no coverage (illegals), and Medicaid expansion will be another 10-20 million, so 20 million could be aggressive), the incremental earnings would be about $3 billion.

 So the net negative to the industry would be $7 billion.

Even if McDonald’s estimates are high (and I’m not saying they are), it does appear that healthcare reform will mean tighter margins and lower aggregate profits for health plans.   Couple that with the non-reform-related erosion of fully funded membership, and indudusty profits are likely to be under pressure for some time.

Addition (Aug. 6, 2009; 10:24 a.m.):  Here’s more on the topic from Deutsche Bank analyst Scott Fidel.

There’s such a disconnect between the current realities of the marketplace and this political rhetoric coming out of Washington about the industry’s “windfall” profits. The economic reality is that this is a highly competitive industry that has among the lowest profit margins of any sector in American business, and is currently struggling with overcapacity and a contracting customer base. If the health insurance industry was actually generating the windfall profits that President Obama and Speaker Pelosi have recently suggested, and also has such attractive prospects for future profit growth due to health reform as is suggested by the Senate Finance Committee staffer, then the managed care stocks would not be trading at the lowest P/E multiples in the history of their industry right now.

I can’t because I don’t live in Massachusetts.  But I would, even though I’m a liberal Democrat and Baker is running for the Republican nomination for governor of Massachusetts.

Baker formally filed to run for governor last week (see video), but he announced his decision a month ago, indicating at the time that he would be liberal on social issues but fiscally conservative. 

I’ve known Baker since he took over Harvard Pilgrim a decade ago and watched him take a bankrupt health plan and put it on sound financial and operational footing — using good humor, common sense and the ability to diffuse confrontational situations and seek compromise.

He’s about as straightforward and down-to-earth as any corporate CEO I’ve ever met.  And while it may come to pass in the course of his campaign that I disagree with him on certain issues (given our opposite political affinities), I honestly believe he would make a very good governor.

Oh, and one other thing, GO YANKEES!!!

NPR’s health policy correspondent Joanne Silberner asks, “Are Insurers’ Profits As Low As They Claim?“  The Wall Street Journal asks, “Will a Public Option Hurt Insurance Company Profits?“

It seems like everyone is talking about health plan profits, which is ironic given that health plan profits are pretty small in the scheme of things (which is pretty much the point of the above-referenced WSJ article). 

Trade group America’s Health Insurance Plans touts the fact that industry profits account for just three cents of every healthcare premium dollar – a margin of about 3%.  As a percentage of total U.S. healthcare expenditures, it’s even less.  The nation’s publicly traded managed care plans have margins in the 4% to 5% range.

Said another way, total health plan profits — if simply donated to cover the cost of healthcare reform — would foot about one tenth of the bill. 

Granted, it’s not nothing, but it does seem to me that there are bigger fish to fry on the provider and pharma side.  As for managed care, my biggest complaints are the high administrative costs and the coverage and care denials that leave patients’ holding the bag (profit motives playing a role in the latter).  Healthcare reform and the right  regulation — even without a public plan — would help.

 Source: America’s Health Insurance Plans

Funny article in today’s Los Angeles Times on the healthcare services available to President Obama and his family.

The White House medical unit, with a staff of four doctors plus nurses and physicians’ assistants, is steps from his office. Treatment is free for Obama and his family (as well as for the vice president and his family).

During the president’s travels, a doctor and nurse ride in a limousine in his motorcade. An emergency medical technician comes too, with an ambulance.

Air Force One is stocked with equipment for an on-board operating room. On overseas trips, two medical teams usually travel with the president, one on the plane and one pre-positioned on the ground so the president will always have a rested doctor and nurse at the ready.

Many of these special arrangements are precautions in the event of an attempt on President’s life, the article notes, adding that White House physicians are military doctors with combat training. 

Obama is responsible for copays and deductibles for inpatient care, the article notes, and thank goodness for that; I wouldn’t want to think the President gets better care than I do.

Second-quarter 2009 net income for the healthcare operations of 10 top managed care organizations rose 1% to $2.095 billion on revenues of $65.433 billion, up 5.6%, according to a tally in the latest issue of Managed Healthcare Market Report. 

The figures include United Healthcare Services (United Healthcare, Ovations, AmeriChoice) Aetna Healthcare and Cigna HealthCare. Including the corporate parents, second-quarter net income rose 32% to $2.776 billion on revenues of $68.67 billion, up 5.2% — largely because in 2008 United took nearly $1 billion in charges to settle class action litigation related to its stock options practices.

“It’s risky to be this upside down.”
Michael McCallister, CEO, Humana
(Aug. 3, 2009 conference call with Wall Street analysts)

We all know that Humana is heavily reliant on government business  – especially Medicare Advantage and Part D.  Shares in the company are discounted to reflect the risk of future Medicare Advantage cuts. 

But today was a good day for Humana.  Shares were up 5% in midday trading after the company announced that second-quarter profits topped Wall Street expectations and that full-year 2009 earnings were on track. 

Medical cost ratio in the company’s government business fell 220 basis points to 84.1%, driven largely by improvement in the stand-alone Medicare prescription drug plan business.  What’s more, McCallister said all the right things about Humana’s ability to reduce costs and weather the Medicare storms going forward.

Unfortunately, like other leading plans, Humana’s commercial business took a hit in the second quarter.  Commercial lives fell 3% to 3.4 million versus a year earlier.  Fully funded group lives alone fell nearly 8% to 1.5 million.  Commercial utilization rose, especially in the company’s small group segment, driving medical cost trends to 7% from a prior range of 6% to 7%.

While Mike and company remain hard-pressed to grow commercial, there is one bright spot: individual membership rose 17% to 347,000 in the second quarter. 

A little history: Humana signed its first individual member in 2002, so its growth in the market has been rapid.  It now offers individual plans in 26 states (the largest being Colorado, Florida, Georgia, Illinois and Texas), with a 27th state planned for 2010. 

Individual is a tricky business where experience is critical to success.  It’s also a market poised for growth given proposed healthcare reforms.  I like Humana’s chances to win in this market.  That said, it remains unclear how much individual will move the needle toward diversification.