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Twelve publicly traded health plans posted a combined 6.9% decline in first quarter net income to $3.6 billion.  However, excluding Cigna, which took a big charge related to its run-off reinsurance business, combined net income among the remaining 11 companies rose 2%.  

If you count only the health insurance operations of Aetna, Cigna and UnitedHealth in the total, net income among the 12 companies rose 4.2%.  Gainers included Health Net, Humana, Molina and WellPoint. Losers included Aetna, Centene, UnitedHealth and WellCare.  Net margin among the 12 companies—again including only the healthcare operations of Aetna, Cigna and United—was 4.1%, down about 30 basis points from a year ago.

Investors are keeping a close eye on the quarterly performance of health plans in the lead-up to the full implementation of ObamaCare and amidst projections by some analysts that the industry is in an underwriting down-cycle.

In his first conference call with Wall Street analysts, WellPoint chief executive Joseph Swedish stated, “I do not currently see vertical integration as a likely path for WellPoint.  The models are so divergent that it just does not seem to be a best use of capital.”

The comments dispel speculation that Swedish—a long-time hospital executive and surprise choice to lead WellPoint—might have been chosen to pursue the acquisition of various types of provider organizations.

Swedish added, however, that WellPoint “will certainly engage with leading providers that are similarly addressing cost efficiency challenges and are willing to align with our products and networks.”  He said, “I spent my career on the provider side of the health care industry, with substantial experience dealing with payment models, reform changes, reimbursement changes and operational improvements.”

Swedish said he expects his efforts at WellPoint to continue to be “characterized by an intense operational focus and a drive for expense efficiency, leveraging technology investments.”

Correction, 4-26-13: We had Swedish’s name wrong in a prior version.

Comments by WellPoint chief executive Joseph Swedish on the company’s first-quarter 2013 earnings call today:

Operating margins on the exchanges would definitely vary by state. But we currently believe that they will be in the low to mid single-digit range across our markets over time….We have substantially completed the exchange base product design and pricing development work. We’ve signed contracts with the majority of our providers across our markets. We feel very good about that. We continue to believe our brand name strength and unit cost advantages position us well to achieve meaningful growth related to the exchanges over time….We continue to focus on competing the exchanges in all of our Blue markets, but obviously can’t fully commit until we know the rates and regulations as they evolve.

Overall, it was a good day for WellPoint.  Shares rose nearly 6% after the company beat Wall Street earnings expectations, reporting a 3% increase in net income for the first quarter of 2013.  The company also raised its full-year 2013 earnings growth expectations.

Correction, 4-26-13: We had Swedish’s name wrong in a prior version.

In this video, New York City deputy mayor Cas Holloway of the lame duck Bloomberg Administration cites “consistent, substantial increases” in premiums and inefficient management as reasons why the city wants to go out to bid for a new health plan.  The $6 billion NYC account has been handled by Emblem’s HIP and GHI for decades.  Holloway says:

HIP and GHI have internal management issues that appear to be driving up the cost of care…There’s not an incentive to manage as efficiently as possible.”

The city also wants workers to contribute to premiums–especially for employees who don’t agree to join wellness programs.  Unions representing city workers are against the proposal.

A loss of the city account, with 1 million lives, would be a huge blow to Emblem.  But realistically, it’s hard to imagine anything happening with this account until after the November elections.  Mayor Bloomberg can’t run again because of term limits.

Health plan earnings season is off to a rocky start, with industry bellwether UnitedHealth Group reporting a 14% decline in first quarter 2013 earnings and sagging margins in its core health insurance business.  Shares fell 3% amid a broader market selloff.  On the bright side, operating income at the company’s Optum health services business nearly doubled.  Optum accounted for more than 20% of UnitedHealth operating earnings in the quarter.

(From the most recent issue of Health Plan Market Trends):

The California Public Employees’ Retirement System has received bids from seven HMOs as it looks to expand the number of choices available to members, stress integrated care management, and migrate away from fully funded health plans toward self-insured coverage.

The result of the bid has important implications for the two incumbent HMOs: Kaiser, with 529,000 Calpers HMO members; and Blue Shield of California, with 400,000.  However, it could be a big blow to Blue Shield.

That’s because Kaiser wasn’t asked to rebid for the business—having already met Calpers requirements around price and integrated care management.  Kaiser will simply continue to be offered as one of the HMO options.  Blue Shield, however, was thrown into the bidding mix with other competing plans and could conceivable lose the entire contract.

Plans bidding on the five-year contract, with coverage effective Jan. 1, 2014, are Aetna, WellPoint/Anthem, Blue Shield-CA, GemCare, Health Net, Sharp and UnitedHealth.  Cigna initially expressed interest, but subsequently dropped out of the bidding.

Update, 4-18-13: Calpers awarded contracts to award HMO contracts to WellPoint/Anthem Blue Cross, Blue Shield of California, Health Net, Sharp and UnitedHealth.

Calpers officials want members have a choice of at least four HMOs, including one serving 33 of the state’s 58 counties, at least one other serving northern California and at least two others serving southern California.  Several of the bids include both fully funded and self-insurance plans—in keeping with Kaiser’s stated goal of migrating toward self-insured coverage, a spokesman says.  Other goals are to mitigate rate increases and to emphasize plans that stress integrated care management.

Among the plans bidding to provide fully funded and self-insured options in northern and southern California included WellPoint/Anthem in 34 counties, Blue Shield-CA in 42 counties and UnitedHealth in 21 counties.  Health Net bid to provide fully funded and self-insured plans in six southern California counties, including Kern, San Bernardino, Los Angeles, Orange, Riverside and San Diego.

Plans bidding for a smaller number of counties included Aetna, which bid to provide fully funded plans in Riverside and San Bernardino counties.  GemCare bid to provide global capitation plans in Kern, San Luis Obispo and Santa Barbara counties.  Finally, Sharp bid to provide a global capitation plan in San Diego.

According to a Calpers spokesman, the most likely winners will be the plans with the broadest reach in terms of counties covered as well as those that proposed different funding options.  In scoring the bids, Calpers rated Aetna as “inferior” and GemCare as “average.”  Both proposed fully funded plans in a limited number of counties.  All the other bids were scored above average.

Health insurance plans participating in exchanges can expect breakeven results in both 2014 and 2015, according to an analysis by Justin Lake of J.P. Morgan.  However, Lake adds that exchange margins will improve to about 2% in 2016 and then normalize at around 3% to 5% thereafter. 

Overall, he expects ObamaCare to negatively impact health plan earnings by about 3% among the diversified managed care organizations in 2014, with margin pressure from exchanges the primary driver. 

Lake expects significant dumping of small group members into exchanges—on the order of 50% of lives over five years.  He also sees a relatively slow ramp-up of exchange membership given the weak health insurance mandate.

Despite rate increases averaging nearly 12%, Blue Shield of California says it still projects its individual health plans will lose well north of $30 million in 2013. 

If that’s true, then it’s valid to ask why the California Dept. of Insurance deemed the company’s individual rate increase “unreasonable.”  The DOI lacks the authority to reject the increases, which the state says took effect March 1 for 268,000 individual plan members.  Note: The CA Dept. of Managed Care, a separate entity that regulates the state’s HMOs, deemed Blue Shield rates unreasonable for another 27,000 individual members.

Here’s the he said/she said:

The DOI says Blue Shield has an excessive individual administrative cost ratio of 20%.  Blue Shield says it will still meet 80% medical cost ratio requirements despite the rate hikes.

The DOI says Blue Shield’s projected medical cost trend of 10.6% for individual is too high.  Blue Shield says the number is based on cost trends for the past five years–adding that the DOI only uses one year of data to project trends.

Blue Shield added 230 basis points to overall individual premiums to cover projected losses from COBRA members moving into the individual market.  The state says this is unreasonable cost shifting.  Blue Shield says it’s not cost shifting at all.

You make the call.

Separately, the DMHC has also ruled that Aetna’s April 1 rate hike of 11.4% for 20,000 small group members is “unreasonable.”

HHS attributes a sharp drop in the number of health plan requests for rate increases of 10% or more in the individual market to “increased scrutiny” imposed by healthcare reform.  Of course, an overall slowdown in medical cost trends probably had an impact as well.

AHIP Study Confirms Medicare Advantage Payments Will Fall 7-8% in 2014
A study commissioned by the American Assn. of Health Plans (Washington) confirms what several analysts and industry observers have already said (see story, this issues): payments to Medicare Advantage plans will fall a projected 6.9% to 7.8% in 2014.

The big question for Medicare Advantage plans given lower-than-expected 2014 reimbursement rates proposed by CMS is as follows: “Is the Obama Administration out to get us.” 

The argument for “yes” includes the rates themselves.  Wall Street analysts suggest that reimbursements could fall 7% to 9% in 2014–factoring in the impact of ObamaCare cuts, new industry taxes and low cost trends (more on the latter later).  CMS has also limited the ability of Medicare plans to reduce benefits.  (Medicare plans usually try to offset the profit impact of lower rates by cutting benefits). 

How bad is it?  Carl McDonald of Citi notes that the rate cuts and limits on benefit changes “would turn almost every plan in the industry unprofitable, and force many smaller Medicare plans out of the business.”  But McDonald adds, “CMS isn’t likely to let that happen,” which brings us to the argument for “no.”  McDonald and others point to a unique admission by CMS in its rate proposal:

We appreciate that plans are facing several legislatively mandated changes affecting payment for 2014, and this may present challenges for plans. We solicit comment on suggestions to address these challenges. 

In other words, we know the new rates stink, so before you get into real trouble let us know what we can do to fix this.  Justin Lake of J.P. Morgan thinks CMS will probably allow more flexibility on benefit cuts than indicated in the proposal.  He also sees the possibility of an administrative fix to physician fees. 

Finally, Lake notes that the only real surprise in the 2014 rate proposal is the lower-than-expected projected rate of increase in per capita Medicare costs–amounting to 2.3% of the rate reduction.  He sees this as a structural , not a philosophical change: “We do not believe CMS is signaling negative intent toward Medicare Advantage.”

Or as CMS notes:

This negative growth trend is due to historically low growth in Medicare per-capita spending, tied, in part, to successful initiatives undertaken to promote value over volume and help curb fraud, waste, and abuse.

All of which leaves Medicare plans facing a challenging 2014.  No wonder shares in plans with a lot of Medicare Advantage business took a hit, with Humana down 6% yesterday and Universal American down 5%.  Other top plans with less exposure to Medicare Advantage–including Aetna, Cigna, Health Net, UnitedHealth and WellCare–were down 1% to 2%.

The general consensus among industry observers was that beleaguered health insurance giant WellPoint would name as its next chief executive someone with strong managed care operating experience–especially in the commercial segment, where the company generates the bulk of its earnings.

Instead, effective March 25, WellPoint is going with Joseph Swedish, who for the past nine years has been head of the not-for-profit Catholic health system Trinity Health Corp. (Detroit).  Shares in WellPoint are down nearly 3% in morning trading on the news.  Interim WellPoint CEO John Cannon will remain executive vice president of legal and public affairs.

That doesn’t mean Swedish is a bad choice.  Hiring a hospital executive worked well for troubled Aetna back in 2000 when it tapped John Rowe of Mount Sinai NY Health as its CEO.  Moreover, there’s a growing rationale for having someone with hospital experience heading up a health plan–given the emergence of provider risk-sharing and the concept of integrated, accountable care.

Finally, Swedish is a guy with a lot of healthcare experience.  Prior to joining Trinity, he was chief executive of Colorado-based healthcare provider Centura Health and also served as a divisional president for hospital giant HCA.  He also served from 2010 to 2013 on the board of publicly traded health insurer Coventry Health Care and previously on the boards of Cross Country Health Care and RehabCare Group.

It’s just that the choice of Swedish is yet another surprise from a company that has delivered a lot of drama for some time now.  At age 61, Swedish is even being viewed by some industry observers as transitional.  But if the main goal was steadying the ship in the short run, then why not go with a safer choice ?  Maybe it’s just WellPoint being WellPoint.

O.K., Aetna Inc. (Hartford, CT) reported a 45% decline in fourth-quarter 2012 net income.  But if you factor out a one-time charge related to a legal settlement, earnings slipped more like 2%.  What’s far more noteworthy is the company’s commercial medical cost ratio rose 440 basis points to 83.4% in the quarter. 

That’s a higher MCR than analyst Scott Fidel of Deutsche Bank was projecting–which he says bolsters the view that the managed care industry in general will see margins narrow in 2013 as the spread between cost and premium trends narrows. 

Still, Fidel maintains his buy rating on Aetna noting that the company’s pricing in 2013 remains solid.  Aetna says that it is “pricing to an appropriate margin to reflect underlying medical cost trend.”  Aetna projects an underlying commercial medical cost trend of 6% to 7% in 2013 and a commercial MCR of 81% to 82%.

All of which will result in operating earnings of $5.40 per share in 2013, Aetna projects, up about 4% from 2012.  Operating earnings in 2012 were down 1% and net income was down 8%. 

So, again, are we entering an underwriting downcycle, are we already in one, and on which side of blah will 2013 end up for health plans earnings?  You make the call.

WellPoint Inc. (Indianapolis) projects earnings of at least $7.60 per share in 2013, down about 7% from last year.  But it’s really not all that bad. 

Company officials said on a conference call with Wall Street analysts today that the forecast is actually in keeping with earlier expectations that profits would be modestly up in 2013. 

The logic goes like this: WellPoint had originally expected 2012 earnings of about $7.35 per share.  Earnings actually came in at $8.18 per share because of better-than-expected fourth-quarter results.  So the 2013 forecast of $7.60 is up modestly compared to the original $7.35 projection, which is no longer operative.

I suppose it’s wrong to penalize a company for doing better than expected.  Investors seem to agree, pushing shares in WellPoint up 1% in morning trading on the strong fourth-quarter results.

In general, WellPoint officials said premium pricing remains rational, even as cost trends are expected to accelerate in 2013.   The company also expects to shed nearly 2% of its medical membership as it tightens pricing.

All of which is well and good.  But in general the results still bolster the view that 2013 will be a year of tightening margins for the managed care industry.

I always feel like I’m late to the party–or hangover (to mix metaphors)–when it comes to projecting health plan profits.  Like many industry observers I had expected 2012 to be a decent year; instead, it was so-so at best. 

On to 2013.  Our recently released Outlook for Managed Care report is calling for yet another so-so year.  So that must mean things are going to improve, right? 

While underwriting cycles are notoriously difficult to predict, several independent data sources suggest the potential for tighter margins as the spread between premiums and medical costs narrow.  One major plan–UnitedHealth–expects 2013 earnings growth of less than 2%.  Another–WellPoint–expects profits to be about flat.

In short, I’m not saying things are going to get worse for health plans in 2013.  But I’m not saying they’re going to get better either.

UnitedHealth said yesterday that individual and small group accounts for only 10% of company earnings per share–indicating fairly limited exposure when these segments migrate to health insurance exchanges in 2014. 

UnitedHealth chief executive Steven Hemsley revealed the figure during a conference call with Wall Street analysts, adding that individual and small group profit margins are comparable to the company’s overall commercial health insurance business.

Hemsley also indicated UnitedHealth will likely participate in 10 to 25 exchanges; however, he added the company isn’t committed to any particular level of participation and will remain flexible.

We will only participate in exchanges that we assess to be fair, commercially sustainable and provide a reasonable return on the capital they will require. And like Medicaid, if we are in a situation or market dynamic that we do not see as sustainable, we will either not participate in the first instance or ultimately withdraw.

UnitedHealth reiterated that earning growth will slow in 2013 to under 2%, compared to a 12% gain in 2012.

A CRG tally of 21 leading not-for-profit health plans shows combined net income fell 14% through six months of 2012.  We did a separate tally of financial data for nearly 200 HMOs in 12 states (for-profits and not-for-profits), which shows combined net income fell 15% through six months of 2012.  Maybe the underwriting downcycle some predict for 2013 already began in 2012.

As expected, Medicare Advantage plans ended 2012 with nearly 13.4 million members, up 10% from 12.2 million in 2011.  The resiliency of the program continues to amaze me. 

Correction (1-9-13): Prior version showed incorrect years.

Carl McDonald of Citi offers the following:

A core Republican principle in the health care world said that one way to fix the system and reduce premiums is to allow insurers to sell products across state lines, so that plans aren’t subject to all the mandates and other items a particular state requires. As we’ve noted over the years, this is one of those things that sounds good in theory, but doesn’t make much sense in the real world. The problem is that while I may love a product sold by Blue Cross Blue Shield of Iowa, I happen to live in Boston. And Blue Cross of Iowa doesn’t have a network or any discounts negotiated with doctors and hospitals in Boston. So while the Blue plan from Iowa would get some relief from not offering every mandate required of insurers in Massachusetts, that’s a drop in the bucket compared to the advantages the local insurers have on the rates they pay to providers. There’s no way Blue Cross of Iowa could offer a remotely competitive product in Massachusetts without those discounts. So it’s been amusing to read some of the articles lately about the shock and utter disbelief some states have had after passing laws to allow insurance sales across state lines. Last year, for example, Georgia passed a law allowing interstate health insurance products. Since then, not a single insurer has asked permission to sell a product that the new law allows. It kind of reminds us of all the hoopla over eliminating the exemption health insurers had from federal anti-trust laws. In theory, it sounded great that eliminating that exemption would improve competition and lower premiums, but in reality, the exemption had no practical impact, and eliminating it wouldn’t change a thing…

I couldn’t have said it better myself. 

Health plan stocks took a beating yesterday after Deutsche Bank downgraded the sector citing soft pricing trends; shares recaptured some of the losses today.  In another view on the potential for an underwriting downcycle in 2013, Justin Lake of J.P. Morgan has this to say:

Yesterday managed care stocks sold off on a competitor’s call for aggressive commercial pricing below medical cost trend in 2013. We disagree with this view given that our proprietary checks with 80% of the CFOs of the large not-for-profit BCBS plans indicate that pricing is in-line….This doesn’t mean we see a lot of upside to 2013 earnings, however, as 2012 was a “so-so” year for commercial risk margins, but we definitely do not expect 2013 to represent an INFLECTION POINT for pricing. [emphasis in original]

Here are the five most-read CRG blog posts in 2012.  Enjoy!

WellPoint Fires Sassi. Is Another Shoe About to Drop?
Why Is UnitedHealth Buying IPA Assets?
Jim Carlson: The Fox in WellPoint’s Henhouse?
Forget Opting Out. Most States Will Opt Into the Medicaid Expansion
ObamaCare is Doomed

From the company’s annual investor conference presentation.  Note the limited exposure to individual and small group.  Individual alone (before the Coventry acquistion) accounts for just 400,000 members and $1.3 billion in revenues with a 3% to 4% pretax operating margin.  Small group has 1 million members and $4.3 billion in revenues with a 5% to 6% margin.

Good news for Medicare Advantage plans from two Health Affairs studies.  The first suggests that members of Medicare plans “might use fewer services and be experiencing more appropriate use of services than enrollees in traditional Medicare.” 

The second suggests that the government has succeeded over the past decade in reducing the type of favorable risk selection historically enjoyed by Medicare Advantage plans by introducing diagnosis-based risk adjustment, a lock-in period for members, and an expanded array of plan types.

In short, the studies suggest that Medicare Advantage plans may be doing a better job than traditional Medicare at controlling costs without necessarily serving only the healthiest members.

Here’s a nugget from the recently released ObamaCare regulations (on which I’ll coment more in a bit): the government figures there are about 10.8 million individual health plan members.  That’s fewer than the 14 million to 17 million number sometimes referred to, which is based on Census Bureau data.  It’s also right in line with CRG estimates.  So kudos to us for once.  (Lord knows, we get enough wrong).