Industry bellwether UnitedHealth Group projects 2014 health plan profits to fall about 15% in 2014 while earnings from the company’s Optum healthcare technology and services division soar. Is this the future for health plans as reform takes a big bite out of industry profits? Not so fast. United says that after the initial hit from reform cycles through, health plan profits will accelerate through 2018 and could double over the next seven to 10 years.
Our latest tally of state insurance filings indicates that 21 leading not-for-profit health plans had a net margin of 4.3% through six months of 2013, unchanged from the same period a year earlier. For the full year 2012, net margin at the 21 companies was 3.9%. Complete details appear in the Nov. 11 issue of Health Plan Market Trends.
Chairman and interim chief executive David Gallitano on the company’s third-quarter earnings call, after announcing the firing of company head Alec Cunningham:
The Board has an obligation, obviously, to always be open to interested parties. There are no active discussions, and I don’t see any potential active discussions at this point in time. But we are certainly not actively pursuing it either. We think the prospects for this company are very strong, and we see a great runway for WellCare, to be candid.
Mario Molina, M.D., chief executive of Molina Healthcare, commenting on Medicaid reimbursement rates during an interview on the outlook for managed care: “The rate environment is a lot better than it was a couple of years ago.”
Shares in WellCare Health Plans initially plummeted but then came roaring back in the days following the company’s announcement that it had fired its chief executive Alec Cunningham.
Comments from the company indicate the issue wasn’t what Cunningham did–which was “a great job,” according to company chairman and interim CEO David Gallitano. It’s what the board perceived Cunningham wouldn’t be able to do: lead the type of big company WellCare expects to become over the next five years.
“The board is looking for a CEO that is more strategic and has a better understanding of how to deal operationally with the complexities of not only the industry but of a larger company,” said Gallitano in a conference call with Wall Street analysts. That includes “more robust and sophisticated ways of dealing with cost structure,” Gallitano said.
“It takes a lot more sophistication in the way of systems, in the way of management processes and in what is expected and demanded of the management team….A lot more reliability has to be placed on the shoulders of people deeper in the organization,” Gallitano said.
Gallitano added that the company had been trying to coach Cunningham and help him ”develop a level of sophistication that we felt was needed” before realizing a change was needed.
So to be clear, Gallitano and the board apparently think Cunningham did a great job at WellCare, but isn’t sophisticated enough, isn’t strategic enough, couldn’t be coached, isn’t good at delegating, doesn’t understand what’s expected of a management team, isn’t equipped to adequately control costs, and doesn’t know enough about systems and management processes.
In questioning the move, several Wall Street analysts note that shares in WellCare are up more than 70% since Cunningham was named CEO in late 2009, including a 39% increase in 2013 alone. In a conference call with WellCare management, Josh Raskin of Barclays Capital pointed to the company’s 25% compounded annual revenue growth rate, improved administrative cost ratio, “huge wins” in Florida and other Medicaid markets and the acquisition of a couple of businesses. All of which is hardly the stuff that dismissals are made of.
“It certainly doesn’t seem like an execution issue,” said Raskin. He added, “We’re struggling here on our side to figure out what capabilities a new CEO would have and why you need sort of a large company CEO at this point.
Carl McDonald of Citi notes that the bigger issue is who would take on the job–given an active board that believes it already has the right strategy and right management team in place and “has shown a willingness to abruptly push the eject button on a very successful CEO.”
We shall see.
Aetna chief executive Mark Bertolini on the company’s third-quarter conference call with Wall Street analysts:
We continue to believe that we are witnessing the start of a marketplace shift to private exchanges as plan sponsors move to defined contribution, converting self-funded membership into fully insured membership. We believe that this shift could…generate financial upside for Aetna shareholders, as fully insured membership typically generates 4 to 5x the profit contribution when compared to self-insured membership. We continue to position the company to capture our fair share of this opportunity, and we’ll participate in many of multi-carrier private exchanges that are emerging today. We are also continuing to develop our own proprietary exchanges.
Utilization of medical services at publicly traded Medicare Advantage plans is lower than at privately held plans, according to data compiled by CRG in Medicare Advantage: The Best is Yet to Come. For example, physician visits per 1000 members were 9% lower than for private plans. Bed days per 1000 were 19% lower, and days per admission were 8% lower. Click here to obtain a copy of the report.
Blue Cross pricing continued to moderate in the second quarter — The change wasn’t extreme, but rates in the commercial group market rose 1.8% in the second quarter on a per member per month (PMPM) basis, down from the 2.2% increase reported in the first quarter….
Everything else being equal, we’d expect to see pricing from the Blues improve in the second half of the year — The impact won’t be significant, but assuming the Blues pass the 2014 health insurance industry tax onto customers, it should result in slightly higher PMPM rates over the next two quarters.
Even with the lower price increase, margins at the Blues have improved — The non-profits have also benefited from favorable utilization, with the medical loss ratio in the first half of 2013 improving 70 basis points, to 82.5%, versus the same period a year ago. Pricing is up an average of 2.0% on a PMPM basis, relative to a cost trend of 1.1%….
Risk membership at the Blues has stabilized over the last year — Last year, enrollment fell 50,000 lives, a drop of 0.3%, and enrollment has fallen another 50,000 lives so far this year. That’s not great, but it’s far better than the significant risk enrollment declines reported by the publicly traded peers.
Health insurance exchange rates in New York will be 53% lower than existing individual premium rates, the state announced. The figure doesn’t include subsidies, the state notes, which will lower effective rates for New Yorkers even more.
It was generally expected that rates would fall in New York’s dysfunctional individual health insurance market with the advent of exchanges. That’s because New York had guaranteed issue and community rating without an individual mandate–a formula for adverse selection. The amount of the decline, however, is eye-popping.
Seventeen health plans will offer insurance through the exchange, including companies like Aetna, Capital District PHP, Excellus, HIP, United and WellPoint. You can see all the rates here.
We’ve written this story before.
Publicly traded Medicaid plans are typically more profitable than privately held plans. One reason why may be that utilization of medical services at publicly traded plans is lower, according to data compiled by CRG in Managed Medicaid 2013. For example, physician visits per 1000 members were 27% lower than for private plans. Bed days per 1000 were 15% lower. Medical cost ratio was 420 basis points lower. Click here to obtain a copy of the report.
I’m very happy to announced that Alan Hughes, EVP and chief operating officer of Blue Cross Blue Shield of North Carolina will be the keynote speaker at our Sept. 20, 2013 conference in Boston on Insurance Exchange Strategies for Health Plans. BCBS-NC is a major player in North Carolina’s individual and small group markets and will have a significant exchange presence.
Health insurance exchanges will revolutionize the market for individual and small group coverage—with dramatic implications for health plan market share, membership growth and profitability. The most successful plans will have formulated a flexible and scalable strategy involving a diversity of elements—product design, pricing, marketing, evaluating the viability of various exchange markets, assessing the likely impact on profit margins, and investing in information technology and other important skill-sets.
During this keynote address, you’ll learn how one health plan has pulled it all together into an exchange strategy bound to win in the marketplace.
WellPoint controls a big chunk of California’s individual health insurance market, so it’s no surprise the company is being fairly aggressive in its exchange plan pricing.
I put together the following chart on how the company’s prices stack up against the competition in some key regions of the state.
The company’s Anthem PPO, for example, is the lowest price silver plan in Sacramento and the second lowest in Alameda, L.A. South, San Diego and San Francisco. It is also the lowest priced bronze plan in Sacramento and the second lowest in Alameda, San Diego and San Francisco. In contrast, WellPoint’s gold and platinum plans tend to be among the highest priced–which is generally considered a good thing because of the risk of adverse selection in the high metal levels.
Based on price, “WellPoint is well positioned” to win at the bronze and silver levels, says Justin Lake of J.P. Morgan. He adds, “At face value this would potentially indicate that WellPoint is likely to attract better risk and higher margins.”
Medicaid enrollment among 30 leading health plans rose 13% to 21.8 million in 2012, according to a tally in Health Plan Market Trends. The nation’s largest for-profit Medicaid plan is WellPoint, with 4.6 million members, up 144% largely from the acquisition of Amerigroup. UnitedHealth is the next largest Medicaid plan, with 3.8 million members in 2012, up 6%. Centene was third at nearly 2.6 million, up 40%. Other Medicaid plans with more than 1 million members included Molina, WellCare and Health Net.
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%.