Corporate Research Group’s Weblog

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.

Net income at 204 HMOs in 12 states fell 15% to $7.6 billion on revenues of $214 billion in 2010, up 3%, according to a tally of state department of insurance data by Health Plan Market Trends Letter.  Net margin at the 12 plans was 3.6%.

However, a big decline in Ohio accounted for the vast majority of the shortfall.  The Ohio shortfall can largely be attributed to WellPoint’s Community Insurance Co., which reported a $2.3 billion net capital gain in 2009, compared to just $15 million in 2010, skewing comparisons.  

Excluding Ohio, net income at the remaining 11 plans rose 12% to $6.9 billion on revenues of $202.3 billion, a 3.4% margin.  A big turnaround in Massachusetts accounted for much of the change, driven by substantial improvement in the financials of Blue Cross Blue Shield of Massachusetts. 

Fully funded HMO membership for the 12 states declined nearly 2% to 39.2 million — continuing a trend of eroding enrollment.

It’s another strong quarter for publicly traded managed care companies, and the main reason is a familiar one – lower than expected medical costs.  While not all the numbers are in yet, our tally of results at 12 companies shows second-quarter 2011 net income rose 28%.  Through six months, net income at the same 12 companies was up 26%.  Net margin in the second quarter was 5.2%.  A discussion of company-specific results appears in the Aug. 1 issue of Health Plan Market Trends.

A controversial Commonwealth Fund study suggests that for-profit Medicaid plans spend less on care, have higher administrative costs and deliver lower quality than not-for-profits.  Medicaid Health Plans of America calls the study “flawed” and argues that it draws universal conclusions about plan ownership from limited data.  But study author Michael McCue of Virginia Commonwealth University says he has been clear about the study’s limitations — especially concerning the quality data – adding it would be difficult to make a connection between higher administrative costs and lower quality.

A separate study from the U.S. General Accounting Office shows that 12% of primary care physicians aren’t accepting any new Medicaid patients, 43% are accepting some new patients, and 45% are accepting all new patients.  It also says physicians are as likely to accept a new uninsured patient as a new Medicaid patient.  Interestingly, practice capacity isn’t an issue, but rather Medicaid pay and administrative hassles.

While Medicaid patients do have problems getting access to physicians, the study shows that the vast majority of physicians see Medicaid patients and that’s good news, according to Katherine Iritani, who headed up the research for GAO.  To those who suggest the study illustrates Medicaid is a broken program — and by extension Obamacare is a bad idea for steering people into Medicaid — Iritani says, “That’s reading a lot more into these results than we would.”

Click here to view video.

John Graham of Pacific Research Institute thinks so:

The most likely explanation for health plans’ stock performance is that investors saw PPACA itself as a boon for health plans. Also, investors likely do not believe that Republicans will eventually repeal it, but instead exercise even less oversight and give health plans more favors than a single-party Democratic federal government would.

It’s an intersting analysis, but I’m going to wait until the current — favorable — underwriting cycle turns down and the full impact of the law’s taxes, profit caps and exchanges kicks in.

First-quarter 2011 enrollment data from leading health plans reinforced familiar trends, according to the latest issue of Health Plan Market Trends. Fully funded enrollment is down. Self-insured, Medicaid and HSA-compatible high-deductible health plans are enjoying gains.

Citi has upgraded shares of  Aetna, Cigna, Coventry, HealthSpring, UnitedHealth and WellPoint to “buy” from “hold,” but warns it’s a short-term opportunity:

Charging customers rates that are meaningfully in excess of underlying cost trends is not a sustainable long-term strategy, so pricing is likely to get more competitive. But there probably isn’t going to be evidence of this until much later in the year, and in the meantime, we believe the headlines will be dominated by big earnings upside. We still think the Medicare & Medicaid plans have more structurally attractive businesses for the long-term.

Not clear.  Citi analyst Carl McDonald says, “United’s results are a positive indicator for the rest of the industry,” with the implications of lower cost ratios obvious.  But UBS analyst Justin Lake notes, ”We would caution that UNH business momentum is beyond that of its peers and others may not have the same” benefit from prior period development.  Complete coverage appears in the latest issue of Health Plan Market Trends.

By Alan Gilbert
Vice President, Business Development
AxSys Health

Managed Clinical Networks (MCN) are an important component in the support of better patient access and treatment through a coordinated care approach.  The MCN concept was created in Scotland in 1999 by the Scottish Department of Health.

Their definition of MCNs is defined as “linked groups of health professionals and organizations from primary, secondary and tertiary care, working in a coordinated manner, unconstrained by existing professional and Health Board boundaries, to ensure equitable provision of high quality clinically effective services throughout Scotland.”

Like a fine wine, this definition has aged well and seems to translate into the current goals of ACOs.

Some features of a MCN include:

• The application integrates primary, secondary and tertiary care services
• A care plan is established which will serve all network stakeholders
• The care plan has the capability to incorporate evidence-based medical practices
• All participating members of the multi-disciplinary care team will have equality of access to the care plan (access rights can be granted, partly or whole)
• Multi-disciplinary team meetings are facilitated through the telemedicine and teleconferencing. Experts at remote sites are able to discuss the patient review patient notes simultaneously
• Automated generation of referral letters, summary documents and discharge letters
• Educational and patient advice leaflets can be accessed and distributed

A specific client example is a Gynecological MCN for the West of Scotland that was established in 2000 to ensure the highest standard of care for all patients with gynecological cancers across the region. This was to be achieved by enhancing the referral system for specialist opinion and treatment, encouraging a multidisciplinary approach and educating all clinicians involved in the care of these patients by open discussion and debate. Participants would include medical & clinical oncologists, gynecologists, radiologists and pathologists. A weekly videoconference was instituted to enable clinicians from across the region to participate in discussions on their patients. The patient data was redacted so that the care-giver did not know if the patient was in their hospital or one of the other 9 hospitals in the region.

Benefits Realized by implementation of the Gynecological MCN included:

• Reduced travel and delays – The MCN was able to discuss individual cases without extensive travel and patients are able to be referred and seen without delay
• Equitable access to care – Patients are guaranteed that they will receive specialist review regardless of geography and that all clinicians involved in their care participate in establishing and reviewing their care plans
• Improved care delivery – The speed of delivery of the treatment plan has improved as all relevant information such as laboratory reports and pathology is recorded and collated through one central system
• Improved education – Clinicians have benefited from the sharing of knowledge through the cross specialty discussions and the meetings also provide an excellent training ground for junior doctors and other clinical staff who attend
• Improved data quality – through a central repository with better audit trail and introduction of standardization and accountability

I believe that as ACOs continue to form collaborative patient care in a community, that models like Managed Clinical Networks should be studied.

From a Citi research note on not-for-profit Blue Cross Blue Shield plans:

We didn’t think minimum medical loss ratios would be much of a concern for the non-profit Blues, but after the big improvement in financial performance in 2010, that is no longer universally the case. Health Care Service Corp., for example, enrolled almost 307,000 individual members in Illinois in 2010, generating just over $800 million in premiums, and a loss ratio of just 72.1%. In Oklahoma, the 2010 individual loss ratio on the company’s 73,500 individual lives was just 73.5%. And in Texas, where HCSC enrolls 415,000 individual lives, the loss ratio was just 64.4% last year. Everything else being equal, and assuming the Blue were able to increase the reported medical loss ratio by 400 basis points through SG&A and tax adjustments, we estimate the rebate on the individual product from just these three states alone would have amounted to $146 million last year.

So clearly this is one Blue plan that will likely have to adjust its premium rates going forward, particularly in the Texas market, since the bulk of the rebate relates to that market. By our calculations, in order to have achieved an 80% loss ratio on the individual product in Texas, the Blue would have needed to price its individual product almost 12% lower than it did in 2010.

Here are my back-of-the-envelope calculations.  Note: a total of nine states have asked for MLR waivers.  Maine’s was approved.

The market reacted quickly and negatively to news from CMS that Medicare Advantage rates will rise a just 0.4% on average in 2012 — driving down shares in health plans with a lot of Medicare membership like Humana, United and HealthSpring.  Humana, for example, was down 0.8% yesterday — the day after the CMS announcement — and another 1% in midday trading today.

Initial CMS expectations announced in February called for a 1.6% increase in 2012; however, CMS says medical expenditure aren’t rising as fast as expected.  CMS doesn’t think the lower payment will have an impact on plan enrollment: “When payment rates for MA plans were frozen from 2010 to 2011, Medicare Advantage enrollment increased by 6% while at the same time beneficiaries’ premiums decreased by 6%.”

Wall Street analysts remain upbeat about the prospects of Medicare plans despite the lower-than-expected 2012 rate increase.  Christine Arnold of Cowen notes that the announcement will enable companies to maintain margins in 2012, with membership flat to up.  “The news is most favorable for Humana,” she says.  Justin Lake of UBS notes, “While stocks may see some pressure…we would be buyers on any weakness as we expect plans will have no difficulty managing benefits/margins for 2012.”

Click here for a copy of Blue Shield of California’s statement that it has withdrawn its request for another individual premium rate increase, which would have affected 340,000 members.  Complete coverage appears in the March 14 issue of Health Plan Market Trends.

Here are three slides from Cigna’s annual investor conference last week.  The first shows how the company’s expatriate healthcare benefits business stacks up against the competition.  The second is a breakdown of international membership by region.  The third is meant to suggest growth opportunities in China.  Overall, Cigna says it expects earnings growth of 10% to 13% annually over the next three to five years.  (Clarification, 3-15-11: The first slide shows expatriate premium equivalents for Cigna’s international business, including the ASO lines of the acquired Vanbreda business.  Separately, Cigna also claims to have the largest number of expatriate members at 740,000).

From a Citi analyis of financial data for 190 Medicaid health plans:

In one of the tougher years in recent memory, it appears Medicaid plans were just barely profitable in 2009, as loss ratios deteriorated about 100 basis points, to 88.4%. There continues to be a big difference in the loss ratios of publicly traded and private Medicaid plans, as the publicly traded plans reported an overall MLR of 86.7%, 320 basis points better than the 89.9% MLR reported by private plans.