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.
From The Kiplinger Letter, April 9, 2010:
At least one new health care program’s likely to run out of money too soon. Subsidized high risk insurance pools for adults with preexisting conditions may run through the $5 billion of federal funds allocated for them long before 2014, when they’ll no longer be needed. That’s when a ban on insurers denying coverage to affected adults kicks in. Odds are the statewide pools will be popular, so Congress will have to deal with the dilemma of whether or not to fork over more taxpayer funds. States that are challenging the law won’t turn up their noses at the money. And if a state opts not to run the program itself, the feds will get a nonprofit to do it.
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.
Jeffrey Kang, M.D., chief medical officer of Cigna, is among the most thoughtful managed care executives — and a nice guy as well. I spoke to him recently at the World Health Care Congress about how health plans can survive reform. His view — not surprisingly — is that health plans must focus on two areas: 1. Wellness and care coordination; 2. Payment reform.
Kang says that the reform legislation is “completely silent” on shifting provider payments from fee-for-service to fee-for-results. “This is a big opportunity for health plans to innovate in the area of payment reform,” he says. Despite all the talk about medical homes and accountable care organizations, payment reform really boils down to incentives and measurements, he says.
It’s important to measure and provide incentives for better outcomes, Kang says, not for improved processes or certifications achieved. Some examples of outcomes to measure might include smoking cessation, weight loss, lower blood pressure, and lower total cost of care. Incentives should be around pay-for-performance, Kang adds, not for shared insurance risk. “We as health plans are better off continuing to hold that insurance risk because we have the actuaries and the capital,” he says. Health plans can then focus on “really trying to create payment methods that give people incentives to improve quality, lower cost or penalties if they miss these targets.” Cigna has eight pilots offering incentives for quality, outcomes and lower total healthcare costs.
As for wellness and disease management, Kang notes, “From a benefit design perspective, the legislation did get it correct” by focusing on first dollar coverage for prevention and screening. “You want 100% of the people to be getting the recommended prevention and screening services. That’s the opportunity that health plans have,” he says. He notes that about 75% to 80% of Cigna’s entire book of business has access to first dollar coverage for preventive services, including all risk and consumer-directed lives; however, utilization is only 60% — representing a big upside.
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.
I’ve been wanting to comment on SureScripts’ 2009 National Progress Report on E-Prescribing released earlier this month, which shows that e-script volume nearly tripled to 190 million in 2009. My official comment is, “Wow!” Granted, this still represents less than 20% of total script volume in the U.S. — and most of the e-prescribing activity is in larger, non-rural healthcare settings. Still, the figures do suggest that e-prescribing is heading for a tipping point. The only surprise is that it’s taken so long to ramp-up – especially given that e-prescribing clearly has the potential to reduce cost and enhance quality of care.
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.
I had promised you a brief write-up of our recent managed care information technology conference in New York. Luckily for me, John Moore of Chilmark Research — who spoke at the event — did a very nice write-up and even better agreed to let us reprint here:
Managed Care, HIT & ARRA
March 30, 2010 by John Moore
Yesterday, had the privilege to attend and present to a packed audience in New York City for CRG’s conference: IT & the Future of Managed Care: The Next Wave. Unlike most conferences I attend that are predominately focused on either the provider consumer sector of the healthcare market (tomorrow its the local New England HIMSS Chapter’s Annual Event), this event was for payers. In light of the recent passage of the Healthcare Reform Act, ARRA and the move to digitize providers, they had a lot on their minds, particularly with regards to their future role in the digitization of medical records….
Key Event Take-Aways:
Payers are struggling to develop new cost control models. The Patient Centered Medical Home (PCMH) is attracting a lot of attention, lots of pilot studies currently underway or will be launched this year. Remains to be seen as to true efficacy of this care model.
Telehealth is definitely ramping up, or at least some of the more innovative payers are looking to use telehealth in rural settings. (Of course, we have heard this so many times before and it remains to be seen if this time it is for real, but Cisco among others is making a big push, and with payers behind it, it may actually take hold).
Payers want to introduce best practices (comparative effectiveness) into the clinician’s workflow to insure that clinicians are complying to well-regarded and uniform standards of care. Again, objective is to lower costs of care and improve outcomes. Challenge, however is that clinicians are trained to deal with variability, they thrive on it. Best practices, standards of care, etc., run counter to clinician training/culture.
Providing cost transparency/comparisons to consumers to allow them to consider costs as a variable in their healthcare decision making is difficult in many regions of the country as providers do not wish to be compared on costs and are reluctant to share such information.
Payers, as they have been for a number of years, are promoting collaborative care but are still running into significant challenges in making this happen. The usual obstacles stand in their way, primary among them is data ownership and trust. Payers are hopeful that HIE initiatives via ARRA and in the future CMS penalties will finally break this log-jam.
Significant interest in what Google Health and HealthVault are doing and where are they headed. Few that I talked to are ready to commit (allow their members to export their claims data) to either platform, but they are having some pretty serious discussions internally as to what they should do. Surprisingly, (then again maybe not) no one at his event ever mentioned Dossia.
This was a well-run event with some excellent presentations. Certainly plenty of hand-wringing in the audience as this sector grapples with both healthcare reform and the digitization of the provider sector. What role payers will play in the future is fairly well-spelled out in the Healthcare Reform Act. Lesser known is what role payers will play within the context of healthcare IT. Payers believe that they can play an important role in facilitating care (via telehealth, care coordination or clinical decision support tools) but as I told the audience in one of my closing comments:
Clinicians do respect the role that payers can play to a point, but there is still a level of distrust and do not expect a clinician to allow you to enter the exam room. Keeping that in mind and respecting it will instill a level of good will that can lead to more fruitful interactions/collaborations in the future.