Corporate Research Group’s Weblog

Three top managed Medicaid executives will discuss the $300 billion dual eligible opportunity for health plans on Wednesday, April 18, in Washington, DC.  The event is CRG’s conference on the Dual Eligible Opportunity for Health Plans.  We are expecting a sold-out crowd so click here to register early.

The Dual Eligible Opportunity for Managed Care
The dual eligible market, with nearly 9 million members, represents a $300 billion opportunity for health plans.  The stakes are huge, but so are the challenges – even for Medicaid and Medicare plans accustomed to the ins and outs of government-sponsored programs.  During this keynote address, you’ll get a clear assessment of the size and profit potential of duals for managed care – as well as an understanding of type of skill-sets and investments required to succeed.

Kevin Hayden President of State-Sponsored Business WellPoint

Assessing the Dual Eligible Pipeline: Which Health Plans Are Best Positioned to Win Question: Which health plans are the most likely to benefit from the dual eligible market – Medicare or Medicaid plans?  Answer: Both.  However, Medicaid is probably best positioned to take the bigger share.  On this panel, you’ll get a competitive assessment of which health plans are most likely to win big in the dual eligible market and why. 

Tom Kelly President & CEO Schaller Anderson an Aetna Company

Legal and Regulatory Challenges in the Dual Eligible Market: A State-by-State Assessment
Competing in the managed dual eligible market means keep tabs on a wide variety of legal and regulatory issues on both the state and federal level.  On this panel, you’ll get a breakdown of trends, developments and key areas of concern on the legal and regulatory front– information essential to planning any dual eligible strategy.

Thomas Johnson President and CEO Medicaid Health Plans of America

For those of you who thought payment cuts would kill Medicare Advantage, think again.  HHS reports Medicare Advantage membership have risen 10% and premiums have fallen 7% since this time last year.  Average premiums are $31.54 in 2012, while enrollment stands at 12.8 million. ”Since 2010, when the Affordable Care Act was passed, Medicare Advantage premiums have fallen by 16 percent and enrollment has climbed by 17 percent,” HHS notes.

From Citi analyst Carl McDonald:

Fundamentally, things aren’t going to be as good for managed care in 2012 as they were in 2011 — While pricing remains above cost trends this year, the spread isn’t nearly as wide as it was in 2011, primarily because premium rates have moderated. In addition, favorable prior year development will now be subject to the minimum MLR calculation, which wasn’t the case last year.

• WellPoint Shares Sink on 4Q11 Profit Decline
• Chart: WellPoint Financial Results by Segment
• Outlook for Managed Care 2012: Steady Profits
• Chart: Forecast Managed Care Industry % Growth, 2009-12
• Managed Care M&A: 2011 is a Break-Out Year
• Chart: Managed Care M&A—Value, Number of Selected Deals, 2003-11

Additional details available here.

• CVS to Buy Health Net PDP Business for $160 Million
• Chart: PDP Market Share, Estimated Valuation, 15 Leading Plans
• Universal American to Acquire APS Healthcare for $227.5 Million
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• Not-for-Profit Blues Take 3Q11 Profit Hit
• Chart: Historic Not-for-Profit Blue Profit Margins
• U.S. Healthcare Expenditures Rise Just 3.8% in 2010; Share of GDP is Flat

Additional details available here.

Research from Citi shows that underwriting margin for non-for-profit Blue Cross Blue Shield plans fell to 2.8% in the third quarter, down 20 basis points from the second quarter.  Citi expects margins to deteriorate further in the fourth quarter.  Still, margins improved through nine months to 3.3%, compared to 3.1% for the same period a year earlier.

The question is what does this say about premium price competition?  Citi notes:

There’s no question premium rate increases will be lower in 2012, in part driven by more aggressive Blue Cross pricing. That said, plans are still pricing above the current cost trend, so provided utilization remains low, margins at the publicly traded plans can still improve in 2012.

Deutsche Bank has released its annual employer health benefits survey, which projects 2012 commercial healthcare premiums to rise 7.2%, down from an increase of 8.2% in 2011.  That’s a lower rate of increase (for both years) than found in other surveys; however, the direction is the same: a slowdown.  After benefit design changes, premiums will rise 6.8% in 2012, Deutsche Bank projects, indicating buydowns of 320 basis points.

All of which could put pressure on health plan profits in 2012.  Deutsche Bank projects that the spread between pricing and costs will tighten to 50 basis points in 2012, compared to 190 basis points in 2011.  In other words, health insurance will be a riskier business next year will less room for error.

Based on the findings, Deutsche Bank has downgraded Coventry and Health Net shares to sell from buy, “given their higher exposure to the Commercial risk market.”  Deutsche Bank continues to rate as buys Aetna, Amerigroup, Cigna, Magellan, UnitedHealth and WellPoint.

Deutsche Bank surveyed 432 self-insured and fully funded employers offering 628 unique plans.

Aetna continues to see a future dominated by accountable care and information technology.  That’s not news, but Aetna CEO Mark Bertolini did a nice job of laying out the case at the company’s annual investor meeting.  Below are a few slides from his presentation (the full deck is here).  Note: Aetna’s investment in decision-support tools and technology now includes iTriage (along with Medicity and Active Health).  As reported in our sister publication ACO Market News, Aetna plans to enter into hundreds of ACO arrangements over the next three years.

Good recap in today’s Wall Street Journal on the blurring of lines in healthcare between insurer, provider and employer:

Hospitals are bulking up into huge systems, merging with one another and building extensive new doctor work forces. They are exploring insurance-like setups, including direct approaches to employers that cut out the health-plan middleman.

On the other side, insurers are buying health-care providers, or seeking to work with them on new cooperative deals and payment models that share the risks of health coverage. And employers are starting to take a far more active role in their workers’ care.

Managed Healthcare Executive interviewed me for an article on health plan profit prospects: 

Mercurio estimates the move to exchanges, coupled with higher taxes and medical-loss ratios that cap profitability, could shave an additional 25% to 30% from insurers’ bottom lines….Many, including Wellpoint, Cigna and Aetna have already begun to diversify, he notes, with UnitedHealth Group leading the pack.

UnitedHealth shares are up nearly 4% in morning trading today, reflecting a broader market rally and I’m guessing relief among investors regarding the company’s 2012 profit forecast.  After spooking investors last month with warnings that costs would rise in 2012, United announced today that it projects 2012 earnings per share to be $4.55 to $4.75 per share, compared to $4.52 to 4.57 in 2011.  That’s up to a 4.5% increase (or about 2% at the midpoint), which is below Wall Street expectations.  Still, Scott Fidel of Deutsche Bank notes that United tends to be conservative in its initial guidance for the coming year, adding that investors will view this early outlook positively.

It’s always difficult to get a read on health plan premium price increases for the coming year, but our best guess based on interviews with employers and by reading into published surveys is that 2012 premiums will rise 7% to 9% before benefit changes.  That’s pretty much in line with findings from Mercer’s annual survey of employers, which notes that 2012 premiums before benefit changes will rise 8.2% in 2012, down from a 9.8% increase in 2011.  For complete details, you can download our free white paper on the topic.

Data from Citi on historical managed care merger and acquisition returns.

Source: Citi

Third-quarter 2011 net income among 14 publicly traded managed care organizations declined 5%, according to a CRG tally.  Net margin was 4.6%.  A complete analysis appears in this week’s issue of Health Plan Market Trends.

Remember how bad things were at Humana before Michael McCallister took over as president and chief executive in February 2000?  Shares in the company had plummeted 54% the prior year.  Losses were mounting.  Costs were rising.  And Michael Moore was roaming the halls of Humana’s corporate headquarters in Louisville, KY, trying to convince the company to change its policy on pancreas transplants by staging a mock funeral for a dying member.  It did.

Over a decade later, Humana is one of the nation’s most successful health plans — and McCallister is one of the industry’s most successful chief executives.  Under his watch, Humana’s stock price has risen 10-fold and net income 12-fold.  Revenues have tripled to $34 billion in 2010.  He led the company’s push into Medicare, and it is now one of the nation’s top Medicare plans.

I always found McCallister to be accessible, down-to-earth and a straight-shooter.  I remember his response to an investor who questioned the company’s heavy reliance on government programs like Medicare.  McCallister’s reply: if you’re concerned about Humana’s exposure to government programs, then don’t invest in Humana.

McCallister, 59, will retire in 12 to 18 months after nearly 40 years with the company.  Humana has put in place a succession plan, naming Bruce Broussard president.  Broussard, who was most recently head of McKesson Specialty Health, is expected to be named CEO upon McCallister’s departure.

I’d wanted to write a brief note about the departure of Jeffrey Kang, M.D., as chief medical officer of Cigna earlier this month but got a bit pressed.  Alan Muney, M.D., replaces.  Kang, who was with Cigna since 2002, has taken a job as senior vice president of health and wellness services and solutions for Walgreen Co. 

I always found Kang to be more thoughtful than dogmatic in his approach to the problems surrounding the U.S. healthcare system.  I interviewed him in the run-up to healthcare reform, when the insurance industry was circling the wagons in opposition of the public option.  Kang noted at the time that health plans would actually “be able to compete favorably with any public option” as long as there was a national provider fee schedule that leveled the playing field — an approach I agreed with then and agree with now. 

Former Cigna public relations executive turned industry whistleblower Wendell Potter calls Kang ”a compassionate man,” noting that “he could always be counted on for a reasoned point of view.”  Prior to joining Cigna, Kang worked for the federal government, serving stints as chief clinical officer for the Health Care Financing Administration (now CMS) and as chief medical officer for the Office of Managed Care.

David Cordani, chief executive of Cigna, on the scalability of physician engagement tools that will come along with the company’s acquisition of HealthSpring:

We don’t believe it will be a one-size fits all model….We do believe philosophically that at the core aligning the physicians’ incentive and engaging them in a more partnered model using information to help to drive improvement in clinical quality is the sustainable way to drive forward.

Bloom Health (Minneapolis) — which provides an online administrative platform for defined contribution health benefits — expects its biggest gains to come from health plans, according to Abir Sen, chief executive. 

That’s not surprising considering that last month three top health plans — WellPoint, Health Care Service Corp. and Blue Cross Blue Shield of Michigan — acquired a majority stake in the company from Sand Box Industries.  BCBS-MI, which was already an investor in the company and increased its stake in the latest transaction, began using the Bloom platform to offer employers defined contribution insurance products earlier this year.  Medica does the same.  WellPoint and HCSC will follow. 

Bloom began in 2009 by targeted employers directly — offering a wide variety of options from various health plans.  To date, it has about 50 employer clients with 20,000 members.  Now it appears a growing share of business will come through health plans offering their own plan options to new and existing employer clients.  Bloom receives a per member per month platform licensing fee from the plans.

What’s interesting is the press release announcing the transaction touts it as a first step by the parties in the construction of a national, private insurance exchange.  My guess is the plans want to avoid leakage of employers to the public exchanges mandated by healthcare reform.  For complete coverage, see the latest issue of Health Plan Market Trends.

I’ve harped on the health insurance industry before about high administrative costs.  A new study from the Commonwealth Fund comparing the U.S. healthcare system to others around the globe reiterates the point.  Insurance administration costs — at about 7% of total healthcare spending in the U.S. — is about three times higher than in Japan, Finland, Australia and Austria, the study says.  Why?

Private health insurance in the United States is characterized by complex benefit packages and cost-sharing designs and high rates of turnover in health plan enrollment. Plans also incur significant marketing and underwriting costs.

O.K., but what about compared to nations like Germany, Switzerland and the Netherlands, where private health insurance is a big player?  The U.S. is still 30% to 75% higher, the study says.  Per capita administrative costs in the U.S. nearly doubled to $532 from 2000 to 2009 and are twice those of France, which spends the next highest amount per capita at $271, the study says.

The U.S. could save $55 billion annually, the study projects, by simply getting its administrative costs in line with other nations that have a mixed public-private insurance system like the U.S.  The savings would top $100 million if the U.S. could meet international benchmarks — in other words the entire cost of ObamaCare.

Health plans have been enjoying strong profits almost entirely because member utilization of healthcare services (and in turn healthcare costs) has been growing at historically low rates.  So it’s no surprise that when UnitedHealth Group reported today it expects an upswing in utilization trends, shares in the company sank (down nearly 4% as of presstime).

UnitedHealth chief executive Stephen Hemsley said on the company’s third-quarter earnings call that “medical utilization will trend toward more normal historical and seasonal levels” in the fourth quarter of 2011 and into 2012.  The upswing is expected to impact all product lines (including commercial, Medicare and Medicaid) and will largely be for services performed in physician and outpatient settings, Hemsley says.  Inpatient utilization remains flat to down.  The company is also seeing treatment costs rise for hepatitis C because of the introduction of certain new drugs. 

Overall, UnitedHealth expects consolidated medical cost ratio to increase to 81% in 2011 and to rise again 2012.  Commercial medical costs are expected to increase about 6% in 2011, driven by unit costs.  Meanwhile, the company is beginning to see pockets of price competition, says United Healthcare president Gail Boudreaux, especially in California and parts of the northeast and mid-Atlantic regions.  Still, she notes, price competition is far from across the board.

UnitedHealth tends to be a bellwether of industry performance, so health plan observers will be waiting to see if other insurers report similar trends.

The year 2011 is shaping up to be a good one for California HMOs, which reported net income of $2.4 billion through the first six months of 2011, up 44% from the same period a year earlier, according to an analysis of data from the state Dept. of Managed Health Care. Enrollment fell 3% to 14 million (excluding Medicare cost, MedSupp, PPO, and other lives).  Excluding Kaiser – which reports both hospital and HMO figures — the rest of the state’s HMOs had net income of $859 million, up 48%.

The beat goes on for health plan enrollment.  Second-quarter 2011 fully funded membership is down, mirroring long-term trends.  Meanwhile, HSA/HRA plan membership continues to show substantial gains, while self-insured and individual are up more modestly.  Complete details appear in this week’s issue of Heath Plan Market Trends.  Membership growth projections for 2012 and beyond will appear in the Outlook for Managed Care 2012. 

Stating its intention to continue to expand in California, Humana Inc. (Louisville,KY) announced an agreement to acquire MD Care Healthplan (Signal Hill,CA), which serves about 15,000 Medicare Advantage lives inCalifornia.  Terms of the deal weren’t disclosed. It is the second acquisition of a Medicare plan for Humana in two months.  In August, Humana announced an agreement to acquire Arcadian Management Services (Oakland,CA), with 64,000 members in 15 states.  Arcadian Arcadian had 2010 revenues of $622 million. 

Scott Fidel of Deutsche Bank notes that while small, the deal is notable because it highlights Humana’s push to expand its Medicare business in the westernU.S.– an area dominated by UnitedHealth/Pacificare, Kaiser and WellPoint.  Humana has historically had a strong Medicare presence in the south andMidwest.  Humana has a total of 4.4 Medicare members, including 1.9 million Medicare Advantage lives and 2.5 million Medicare drug lives.  The MD Care deal accounts for less than 1% of Humana’s Medicare Advantage members.  Total Medicare lives in California are about 200,000.

Underwriting margins among leading not-for-profit Blue Cross Blue Shield plans improved to 3.6% through six months of 2011, up 11o basis points from 2.5% for the full-year 2010, according to a Citi analysis of NAIC filings for 33 plans. Net profit margin improved 70 basis points to 4.5%.

The 33 plans reported net income of $3.183 billion on revenues of $70.82 billion through six months of 2011. Membership declined 0.6% to 42.9 million. The figures exclude non-risk business along with data on specialty lines that aren’t required by state regulators. Medical cost ratio through six months was 84.4%, an improvement of 110 basis points compared to last year.

Assurant Inc. (New York) reported that after-tax operating income at its health insurance segment declined 79% to $5.2 million, a shortfall the company attributes partly to healthcare reform.   Specifically, the company says it reduced second quarter after-tax operating income at its health segment by $10.9 million to reflect accruals for premium rebates associated with minimum medical cost ratio requirements.  The rebate accrual was partially offset lower operating expenses, reduced agent commissions, and lower sales of new policies driven by the commission cuts, the company says. 

Said another way: healthcare reform is bad for health plan profits.  But you knew that already.