Corporate Research Group’s Weblog

Make that one more, with Medicare plan HealthSpring posting better-than-expected first-quarter profits and raising its 2010 earnings forecast.  The landslide is on as health plans officially pull out of the underwriting downcycle that has plagued the industry over the last couple of years.  HealthSpring’s net income jumped 64% in the first quarter, Medicare Advantage membership rose 36%, and revenues were up 18%.  Medicare Advantage medical cost ratio fell 300 basis points to 78.3%.

O.K., this is officially a trend.  Buoyed by strong first-quarter performance, Aetna Inc. (Hartford, CT) raised its full-year 2010 earnings forecast to between $2.75 and $2.85 per share, compared to a prior forecast of $2.55 to $2.65.  That makes Aetna the fifth major health plan to report strong first-quarter results, and the fourth major plan to raise its 2010 earnings forecast (see prior post).  The company attributed the strong results to a better-than-expected first-quarter commercial medical cost ratio of 81.1%, down 60 basis points from a year earlier.  Premium rate increases are exceeding medical cost trends of 8.5% to 9.5%, with the company squarely focused on margin improvement over membership growth.  Medical membership fell 2% in the quarter to 18.7 million.

Yet another health plan has posted better than expected earnings, with WellPoint Inc. reporting first-quarter 2010 net income of $876.8 million, up 51%, on revenues of $15.099 billion, down 0.3%.  Net margin was 5.8%.  WellPoint is the latest major managed care plan to beat Wall Street expectations in the first quarter — the others including Centene, Humana and UnitedHealth.  Unlike the others, however, WellPoint didn’t raise its 2010 earnings forecast — although Wall Street analysts view the company’s full-year 2010 net income projection of at least $6 per share as somewhat conservative.  The company attributed the strong first quarter in part to lower than expected flu costs.  In additional, medical cost ratio fell 70 basis points to 81.8% compared to a year earlier.

My expectation (see Outlook for Managed Care) was that in 2010 health plan profits would exceed expectations — in some cases by a wide margin.  So far, we’re off to a good start.  UnitedHealth Group reported a 21% increase in first-quarter 2010 net income (earnings per share rose 27%).  The company also increased its 2010 profit forecast. Same for Humana, which reported a 26% increase in first-quarter net income and raised its full-year 2010 profit forecast.  Several factors drove the strong results — but an upswing in the underwriting cycle (i.e., pricing is comfortably ahead of cost trends) was a big factor.  This isn’t surprising and should result in other plans posting blowout 2010 results as well.  The politics of this improved performance won’t be pretty — even though the results aren’t sustainable given the long-term strictures healthcare reform puts on industry economics.

Correction (April 27, 2010): Last line incorrectly read “aren’t unsustainable.”  Corrected to read, “aren’t sustainable.”

I must confess I have a chauvinistic bias that in general women are better human beings than men.  However, I may have to reevaluate that position if there’s any truth to the recent Reuters report that WellPoint – a company headed by a woman — is using a software algorithm to target women with breast cancer so that the company can find pretexts for canceling their health insurance.  WellPoint denies that it singles out women with breast cancer for rescission (the retroactive canceling of a member’s insurance policy) — noting that its software “is used to look at a series of diagnostic codes meant to capture conditions that applicants would likely have known about at the time they applied for coverage.”  In other words, the software is supposed to help identify people who committed fraud by lying on their insurance application.  The company says less than one-tenth of 1% of its individual insurance policies are rescinded.

The Reuters report puts WellPoint back in the crosshairs of the Obama Administration, with HHS Secretary Sebelius calling the rescissions ”unconscionable” and “deplorable” in a letter to WellPoint chief executive Angela Braly.  More broadly, actions like the one WellPoint is being accused of are a primary reason why we have healthcare reform — i.e., the industry’s fundamental failure to consistently provide members with the healthcare coverage they need — and have paid for — when they are sick.  (And I’m not talking about legitimate cases where health plans deny questionable or experimental treatments with limited or unproven benefits).  Unless the industry seriously addresses this issue, the regulatory hammer — along with public opinion — is only going to come down harder.

Addition, April 28, 2010: WellPoint announces it will implement federal rescission reforms effective May 1, ahead of healthcare law deadlines.  As the company notes, “The standard contained in the federal legislation requires insurers not to rescind policies except in cases of fraud or intentional misrepresentation of material fact.”

Carl McDonald of Oppenheimer hit on the irony of UnitedHealth Group’s strong first-quarter 2010 profits:

The Obama administration won the health care war, aided by big individual rate increases from WellPoint and other plans; UNH is now giving Democrats a reason to drag managed care bodies through the streets with its massive upside versus consensus in 1Q and higher guidance for the year, driven by a very favorable spread between pricing and cost trends. To the ruling class in Washington, though, this just looks like another example of an insurance company gouging its customers and it serves as a powerful reminder to some of why strict regulation of premium rates and medical loss ratios is required.

McDonald also raises another interesting point:

In a non-reform environment, we’d be a huge supporter of managed care stocks, because the industry appears to be on the verge of a cyclical upswing in margins, driven by higher premium rate increases and lower utilization.

What he’s saying is that the insurance underwriting cycle is turning up, as I’ve argued before (here and here) — and that means a run of strong profit performance for the industry at least before the full impact of reform kicks in.  All of which spells political trouble for health plans at a critical moment.  Or as I wrote last year:

It will be difficult to remember that managed care is a struggling industry when the underwriting cycle turns up, boosting industry profits.  That’s especially true as the up-cycle will likely gain momentum coincident with rollout of the initial elements of reform — masking longer-term challenges such as the erosion of the industry’s lucrative fully funded business lines.

I was trying to think of a good analogy to the recent developments in Massachusetts, where last week a state court judge denied (full text here) a request by six health plans that would have allowed them to raise premiums for small group and individual members at double-digit levels effective April 1.

Massachusetts Superior Court Judge Stephen Neel denied the plans’ request for a temporary restraining order blocking the state Dept. of Insurance from disapproving the hikes; instead, the state will perform an in-depth review of the proposed increases.  The state disapproved the hikes through an emergency regulation issued at the direction of Mass. Gov. Deval Patrick as part of an effort to rein in rising healthcare costs for small businesses. 

State Insurance Commissioner Joseph Murphy found the increases to be “excessive” and “unreasonable,” noting the hikes significantly outpaced the rate of increase in medical costs without adequate justification.  The six plans — Blue Cross Blue Shield of Massachusetts, Fallon, Harvard Pilgrim, Health New England, Neighborhood and Tufts – had argued that failure to raise rates immediately would result in combined losses topping $100 million, deplete reserves, weaken financial stability and even threaten insolvency.  However, the judge ruled that the plans “have not demonstrated that they will suffer irreparable economic harm over the next few months,” during which time they can pursue the usual administrative remedies and appeals.

Here’s my analogy: Remember when President Reagan broke the air traffic controllers union, and suddenly it was open season on workers?  Well, healthcare reform and President Obama’s rhetoric on premium increases by companies like WellPoint has resulted in open season on health plans.  Or as Justin Lake of UBS says, “Given the high-profile nature of the Massachusetts rate dispute, we do note the potential for a domino effect with other states possibly using the opportunity to join in.”  Stay tuned.

I just got confirmation that Aetna Inc. president Mark Bertolini will be the morning keynote speaker at our June 28, 2010 conference on How Health Plans Can Survive Reform.  I’m very excited to have Mark join the program.  Aetna is a company that is well-positioned to succeed in a post-reform world.  The company’s leadership has stressed four key areas: 1. Products and services that improve quality and control costs; 2. Convenient tools and easy-to-understand information to help members make better-informed healthcare decisions; 3. Transparency; 4. New wellness and prevention programs. 

Also speaking at the event is Carl McDonald, equity analyst of Oppenheimer.  Carl is one of the industry’s top analysts, and he’s done some great work modeling the likely impact of healthcare reform on health plan profits and competitiveness — including the implications of healthcare exchanges, individual and small group insurance reforms, minimum medical cost ratios, expanded Medicaid eligibility, cuts to Medicare Advantage payments, and new industry taxes. 

I’ll keep you posted on other speakers as they come on board.

Here’s a video interview of Joe Miller, director of eBusiness for AmeriHealth Mercy, discussing how healthcare information technology can help plans better manage the influx of Medicaid members under reform. From the World Health Care Congress in Washington, D.C., April 11-14, 2010.

In this video interview, Tricia Nguyen, M.D., senior medical director of Blue Cross Blue Shield of Florida, offers some balanced comments on how health plans can survive reform by reducing cost and improving quality and access through care management programs.  From the World Health Care Congress in Washington, DC, April 11-14, 2010.

I just got back from D.C., where I attended the 7th annual World Health Care Congress (a sister company to CRG).  As usual, the event had a great mix of high level speakers and topics.  CNBC had video interviews with Ron Williams of Aetna (here) and David Cordani of Cigna (here).  I’ll have more to say as I pull my notes together.  But for health plans, the big question was how will they survive reform.  The answer of course is that the industry has to deliver on the promise of reducing cost while improving the quality of care.  It’s no surprise that there was a lot of discussion among health plan executives about wellness initiatives, disease management, realigning provider incentives, evidence-based care and end-of-life care.  There was also a lot of talk about how health plans, employers and providers can better collaborate toward the shared goals of better, more efficient care.  How this all plays out in the real world is another story.

My final offer is this: nothing.
–Michael Corleone, The Godfather II

As expected (and as required by healthcare reform legislation), CMS announced that payment rates to Medicare Advantage plans would be unchanged in 2011.  That’s a 0% increase over 2010.  Nada.  Nothing.  After adjustments, rates are expected to be down as much as 1.7%, according to estimates from Justin Lake at UBS.   It’s still better than the 5% cut in 2010, but as Christine Arnold of Cowen notes, reimbursements won’t nearly keep pace with Medicare Advantage medical costs, which are rising around 5%.  Adds Carl McDonald of Oppenheimer:

Medicare is going to be a very challenged product in the years ahead, with major margin pressure.