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Horizon Blue Cross Blue Shield of New Jersey (Newark) — which two years ago announced its intent to convert from not-for-profit status to a for-profit publicly traded company — confirmed that it suspended all work on the conversion application in light of last year’s state gubernatorial race and the election of a new governor.  Horizon hasn’t withdrawn its application with the state of New Jersey to convert; however, the company said it hasn’t decided when it will resume work on the application.  The company added that it continues to consider conversion in the context of the healthcare reform.  My take was that the conversion of Horizon to for-profit status would be a precursor to an eventual acquisition by WellPoint.  Now the question is how much will the profit pressures of reform challenge the company’s financial flexibility – and what options are available assuming no conversion is in the cards.

Correction (May 25, 2010): A statement innacurately attributed to the company was deleted from the above story.

PriceWaterhouseCoopers outlines in a new report what health plans need to do to survive reform:

Many health insurers will have to lower administrative expenses to meet the new medical loss ratio (MLR) of 85 percent for the large group market and 80 percent for the small group and individual market….Successful insurers will have to shift their attention from group to individual plans, which are expected to triple between 2010 and 2019.  Over the next 10 years, growth in the Medicaid coverage will also increase substantially.  Health insurers will have to differentiate themselves on price, service, quality, and provider network in the insurance exchanges. With regulations requiring four standard benefit packages, essential health benefits, and limits on cost sharing, insurers will have to compete on factors other than benefit design.

The consensus among industry observers is that minimum medical cost ratios required by healthcare reform will eat into the profits of health plans immediately after taking effect in 2011. 

“The hit won’t be enormous, as plans will reduce broker commissions and cut non-core SG&A,” says Carl McDonald of Oppenheimer, “but we now anticipate earnings growth of just 3% next year for the larger, diversified plans.”

Health plans must have a medical cost ratio of 80% for individual and small group business and 85% for large, or they will be required to rebate premiums to customers. 

Justin Lake of UBS notes that margin pressures from minimum MCRs could be offset by continued improvement in the health insurance underwriting cycle.  Still, Lake lowered his 2011 profit growth forecast for managed care reflecting the impact of MCR floors.

Lake says 6% to 11% of the profits of the publicly traded health plans he covers are at risk because of MCR floors.  Coventry has the largest exposure at 10% of earnings, he says, followed by Humana and WellPoint, each at 7%. 

One company that doesn’t have too many MCR concerns is Health Net.  Christine Arnold of Cowen recently upgraded Health Net to a buy – noting that it is one of the few companies that should have no difficulty meeting MCR floors.

What do you call it when a company outlines a strategy and then delivers on it?  Answer: Success.  Last year Cigna said it would tighten its U.S. operations while seeking growth globally.  In the first-quarter of 2010, the company reported blow-out after-tax profits of $72 million at its international segment, up 76% from the same period a year earlier.  Premiums and fees rose 21% to $527 million, while after-tax profit margin jumped 400 basis points to 13%.  The company attributed the growth to favorable claims experience in its expatriate benefits business and strong sales and renewals, especially in its health, accident and life insurance line.  Cigna also reported a $7 million after-tax gain from currency exchange.  Whether the international growth is sustainable remains to be seen, but it’s a good start for David Cordani – now five months into his tenure as CEO.

Angela Braly, chief executive of WellPoint Inc., expressing disappointment in a letter to President Obama for alluding in his weekly radio address to a report that the company was systematically dropping insurance coverage of women with breast cancer:

The actual facts could not be clearer.  In 2009, WellPoint covered the treatment of approximately 200,000 women with breast cancer at a cost of nearly $2 billion.  During the same period, there were four cases nationwide where the issue of breast cancer or the possibility of breast cancer was identified in a rescission, but they were not singled out because of their breast cancer.  Clearly, covering the treatment of close to 200,000 while rescinding four policies should make our intent in this regard quire clear.  Our policy on rescissions has always been that it is based on fraud or misrepresentation.

Our June 28, 2010 conference in New York on Can Health Plans Survive Reform? (moderated by yours truly) is shaping up to be quite an event, with top speakers from health plans, consulting firms and Wall Street.  My take all along has been, yes, health plans will survive reform; however, the industry will be less profitable and will experience another round of painful consolidation.  But the best and strongest will survive. 

Keynote Speaker
	Mark Bertolini, President Aetna Inc.
Health Plan Speakers
	Joyce Hagen SVP, Chief Marketing and Development Officer AmeriHealth Mercy
	Linda Tiano President Health Net of the Northeast
	Michael Adelberg VP, Public Policy and Government Relations Universal American
	Joseph Berardo CEO and President MagnaCare Holdings Inc.
Analysts and Consultants
	Carl McDonald Equity Analyst Oppenheimer
	William MacBain SVP, Finance Gorman Health Group
	Mark Lutes Member of the Firm EpsteinBeckerGreen
	Carl Mercurio President, Managed Care Analyst Corporate Research Group

Net income among 13 publicly traded health plans jumped 34% in the first quarter of 2010, according to a CRG tally.  The 13 plans posted first-quarter net income $3.4 billion on revenues of $72.4 billion — a net profit margin of 4.7%.  Revenues in the quarter were up a scant 1.7%.  O.K., we know these results aren’t sustainable given the long-term strictures healthcare reform puts on industry economics (see prior post).  But as we had predicted (see Outlook for Managed Care), 2010 is going to be a very good year for the managed care industry, driven an upswing in the underwriting cycle.  As for the politics of these strong results, well, you be the judge.

No sooner did I report yesterday that the Obama Administration is seeking to accelerate the timeline on healthcare reform, then HHS Secretary Sebelius issued a letter to state governors and insurance commissioners urging them to re-examine any WellPoint rate  increases — this after the company admitted to “inadvertent miscalculations” in the criteria it used in California to unsuccessfully attempt to push through a 25% individual rate hike. 

Sebelius urges states “to review WellPoint’s rate filings for mistakes similar to those made in California, if you have the authority to undertake rate review, and, if you do not, to seek authority to prior-approve health insurance rates.”  She adds, “Even small errors can mean unaffordable premiums for policyholders.” 

WellPoint withdrew its rate request in California after state regulators found the proposed increase was based on unreasonably high projected medical cost increases.  WellPoint expects to revise and resubmit the request.  How much fallout can be expected — for WellPoint and health insurers in general — from heightened scrutiny by the states?  Justin Lake of UBS notes:

The potential for further mathematical mistakes is clear given the thousands of rate filings that are likely to be removed, although we believe in the case of WellPoint there is minimal risk of ‘systemic’ mistakes similar to that made in California….That said, it is impossible to predict the trajectory and severity of the political fallout from the WellPoint California issues and general ‘demonization’ of the managed care group.

Or as Sebelius says in her letter:

Experience has shown that, where the prior-approval rate authority does exist, rate increases can be moderated, while still enabling insurers to earn a reasonable profit.  Just last month, for example, a Maine court affirmed the Maine insurance commissioner’s decision to reduce Blue Cross of Maine’s proposed 18-percent rate increase to 10 percent.

Sebelius notes that healthcare reform will provide states with $250 million in funds to help with rate reviews.  She also points out that when insurance exchanges come online in 2014, purchasers will have meaningful comparative price information.  She adds, however, that in the meantime, “individual and small business insurance purchasers have little or no bargaining power….That’s why state assistance is so necessary to prevent excessive rate increases.”

All of which brings us back to comments I reported on yesterday from George Olsen of Williams & Jensen: “The Secretary is trying to jump out in front and accelerate the process…The Administration is very concerned about premium increases” prior to the creation of health insurance exchanges in 2014.

The Obama Administration is pushing to accelerate health insurance industry adoption of certain provisions of healthcare reform in advance of the deadlines required by the new law, according to George Olsen, health policy expert and president of the law firm Williams & Jensen.  “They want to show the public that this thing is actually working and providing some benefits” before taxes and fees kick in, Olsen said during a conference call sponsored by Credit-Suisse.  Specifically, he pointed to efforts to accelerate adoption of regulations concerning rescissions, unreasonable premium rate increases, minimum medical cost ratios, and allowing young adults to remain on their parents’ insurance policy up to age 26. 

For example, a Reuters report suggesting that WellPoint was targeting women with breast cancer (see prior post) so that the company could find pretexts for canceling their health insurance “touched off a firestorm here in Washington,” Olsen said, with HHS Secretary Sebelius, House Speaker Pelosi and key Congressional Committee chairs calling for an end to the practice.  The insurance industry quickly fell in line, with America’s Health Insurance Plans stating in a letter to key House Democrats its members were committed to implementing the new standards in May 2010 — four months ahead of schedule.  AHIP also noted that its members are already allowing young adults to stay on their parent policies in advance of the September deadline.

Olsen also pointed out that Sebelius formally sought public comment in advance of the creation of rules concerning federal annual review of unreasonable rate hikes by health plans.  “The Secretary is trying to jump out in front and accelerate the process,” he said, adding, “The Administration is very concerned about premium increases” prior to the creation of health insurance exchanges in 2014.   Olsen also pointed out that Sebelius asked the National Assn. of Insurance Commissioners to outline by June 1, 2010 — six months earlier than required by law — a uniform definition of what constitutes medical costs for use in calculating minimum medical cost ratios required by the legislation.