Corporate Research Group’s Weblog

Click here and here for slide presentations from WellPoint’s investor day, which provide a pretty good feel for the strategic direction and general mood of both the company and the managed care industry in general.  WellPoint expects 2011 net income to fall 6.5%; however, profits are expected to grow at least 10% annually for the next five years.  Membership is expected to grow, but so are costs.  The company expects medical cost trend to accelerate in 2011 to between 7% and 8%, compared to 6% to 6.5% in 2010, driven by unit cost increases, rising utilization, higher flu costs, rising drug trend and reform-related expenses.  Strategic initiatives include rationalizing existing products, driving volume growth in others as margins tighten, and expanding into non-core businesses.  Also on the agenda, lower administrative costs.

Stocks are up, 2012 payment rates are up and membership continues to rise, according to the latest issue of Health Plan Market Trends Letter.  Total Medicare Advantage lives – including HMO, PPO and PFFS – rose 5% to 11.1 million as of Jan. 1, 2011, compared to a year earlier.  UnitedHealth Group had the most Medicare Advantage lives at 2 million, up 7%.  Humana followed with 1.8 million, up 2%.

So much excitement over a measly 1.6%.  Still, shares in health plans with heavy Medicare exposure are soaring today after Friday’s announcement by CMS that Medicare Advantage payment rates are expected to rise 0.7% in 2012 (1.6% after adjusting for quality bonuses).  For example, shares in Humana are up 5% in midday trading, while HealthSpring shares are up 3%.  The projected 2012 increase is way better than what was expected by Wall Street analysts.  Notes Christine Arnold of Cowen:

Friday’s announcement secures the payment outlook for 2012, in our view, which will enable companies to maintain and/or expand margins while maintaining and/or growing membership.

From the perspective of investors, that’s good and/or great news.

Here’s yet more data working against health plans attempting to justify rate hikes.  Medical expenses for 852 health plans declined 1.6% through nine months of 2010, according to an analysis by Weiss Ratings (Jupiter, FL) of state health plan regulatory filings.  Weiss expects the plans to finish 2010 with a 3% decline in medical expenses, the first time in 10 years medical costs haven’t risen.  Gavin Magor, senior insurance analyst for Weiss, notes:

This is a critical change from the steady and rapid increases of prior years.  If it continues in 2011, it should help boost health insurer profits while pressuring companies to curb premium increases and give consumers some much-needed relief.

Magor’s comments don’t take into consideration new taxes and rebates tied to medical cost ratio regulations under healthcare reform.  Nor is Magor clear on exactly why costs declined in 2010; however, he points to some likely suspects.  Membership among the plans was down about 2.6% through nine months, hospital days were down 2%, and office visits were down about 3%.  Cost shifting from health plans to members is also a likely factor, he says.  Magor also says it’s likely some members are foregoing care or price-shopping given the difficult economy.

The data doesn’t include California, which has different health plan financial reporting requirements than other states.  Furthermore, the data is muddy because it encompasses all lines of business in the plans’ filings, which in addition to commercial HMO may also include vision, dental, behavioral, Medicare, Medicare Supplement, Medicaid, Federal Employees Health Benefits Plan and other members.

Source: Weiss Ratings

Blue Cross Blue Shield of Massachusetts (Boston) is reporting unprecedented interest in a new health plan that jacks up member copays for procedures at 15 hospitals on its list of “high-cost” facilities.

According to a spokeswoman, nearly 30% of BCBS-MA’s small business and individual clients renewing in January 2011 signed up for the Hospital Choice Cost-Share plan.  Typically, a new plan option attracts just 1% to 2% of BCBS-MA businesses in the first year.  A separate BCBS-MA tiered network product called Blue Options – launched in 2007 – has 95,000 members.

HCCS offers average premium savings of about 5% compared to traditional plans.  However, member copays in six key areas are far higher.  For example, inpatient copays at one HCCS plan are $1500 for high-cost hospitals versus $500 in low-cost hospitals (see chart).  Outpatient day surgery copay is $1250 at high-cost facilities versus $250 a low-cost facilities.

Among the hospitals on the high-cost list are major academic centers like Brigham and Women’s Hospital, specialty facilities like Children’s Hospital Medical Center and community hospitals like Cape Cod Hospitals.  Additional coverage, including comments from hospital officials and sample copay levels, appears in the Feb. 14, 2011 issue of Health Plan Market Trends Letter.

This is why I’m not a Wall Street analyst or fund manager.  Who’s have guessed that health plan stocks would soar in 2011, up nearly 15% for the year through Feb. 11, according to a CRG tally of 14 leading issues.  In comparison, the Dow Jones Industrials, Nasdaq Composite and S&P 500 are each up about 6% year-to-date.  The biggest gainers included Amerigroup, up 25%; Aetna and Molina, up 23% and HealthSpring, up 21%. 

Among the nine publicly traded managed care organizations reporting fourth-quarter 2010 financial results to date, combined net income fell 43% to $2.7 billion, according to a CRG tally.  However, the falloff can be attributed largely to WellPoint, which recorded a $2+ billion gain in 2009 related the sale of its NextRx pharmacy benefit management unit, thereby skewing 2010 comparisons.  Excluding WellPoint from the totals, net income rose 10% for the quarter and 24% for the year at the remaining eight companies.  All told, it’s a pretty good showing.  Publicly traded companies yet to report fourth-quarter results are Amerigroup, HealthSpring, Molina and Universal American.

Shares in Aetna are up nearly 9% in morning trading, after the company announced a 15-fold increase in its dividend and a 2011 profit forcast that exceeded Wall Street expectations — good news from a major publicly traded health plan at a time of concern over industry prospects going forward.

Aetna said it was instituting a quarterly dividend of $0.15 per share, compared to an annual dividend of $0.04 previously.  The yield is about 1.7% following the morning share run-up.  Aetna is projecting 2011 operating earnings of $3.70 to $3.80 per share in 2011, up about 2% compared to $3.68 in 2010.  Aetna expects premium increases in 2011 to mirror medical cost trends projected at about 7.5% to 8.5%.  Medical membership is expected to fall about 4% to 17.8 million in the first quarter of 2011, compared to year-end 2010, and then stay flat over the remainder of the year. 

Btw, you might be wondering which of the major Wall Street analysts had a “buy” rating on Aetna leading up to today’s announcement?  Christine Arnold of Cowen and Scott Fidel of Deutsche Bank both did.    Among other top analysts, Carl McDonald of Citi rates Aetna “hold,” and both Charles Boorady of Credit Suisse and Justin Lake of UBS rate Aetna “neutral.”

Health insurance industry profits are expected to fall at least 10% in 2011, according to the Outlook for Managed Care 2011. 

Among the healthcare reform-related pressures on profits beginning in 2011, new minimum medical cost ratio regulations will likely force health plans to rebate up to $1.5 billion.  Health insurers will also be saddled with new taxes.

Even without reform, the report notes, health plans face a variety of structural issues – including the continued deterioration of fully funded membership and the shift toward low-premium high-deductible health plans.  The advent of ACOs also threatens the relevance of health plans by diminishing the industry’s central role in managing risk.

Faced with both structural and reform-related profit pressures, health plans are re-evaluating every aspect of their business, the report says.  Initiatives include layoffs, international expansion, diversification, provider payment reform, retail-based and consumer-driven healthcare, slashing broker commissions, and using of technology to streamline administration, facilitate member decision-support and improve population management.