Health Net, 15%. Aetna, 28%. UnitedHealth Group, 35%. PacifiCare Health Systems, nearly 260%.
The second quarter was one of soaring profits at health plans nationwide, a payoff from higher premiums and an easing in the breakneck speed of medical cost growth. Insurers not only reported substantial earnings gains but also raised 2003 projections, in some cases for the second or third time this year.
Providers plan to strike while the iron is hot. Jan Emerson, spokeswoman for the California Healthcare Association, said hospitals would redouble their push for higher reimbursement now that insurers "can no longer cry poverty."
"A year ago, health plans were trying to deflect attention from themselves by blaming hospitals for rising healthcare costs," Emerson said. "But now, it looks like they are back in the hot seat."
Providers, however, may end up competing with employers and patients for a share of the windfall. Although health plans' record profits aren't likely to result in notable price breaks for employers or patients right away, slowing premium increases is on many insurers' agendas.
Meanwhile, the jury is out on what effect, if any, the industry's financial performance will have on the congressional debate over restructuring Medicare.
"Employers are almost at the point where they can no longer cost-shift and are saying, `We can't take this anymore,' " said Michael Taylor, a principal with benefits consultant Towers Perrin in Boston. "That will eventually dampen premium increases, though not until 2005. I think we still have at least one more year of serious, double-digit increases before us."
Slowing sales of expensive drugs and softening demand for hospital care have lowered insurers' medical cost growth to an industry average of about 10% this year, with some companies, such as Aetna, seeing medical cost growth slow to as low as 7% in the second quarter, down from as high as 15% in mid-2002.
Insurers' pharmacy costs eased dramatically after the wildly popular allergy drug Claritin went over the counter in December 2002. Now that Claritin is available without a prescription, most health plans no longer cover it and many others since have boosted copayments for rival prescription allergy medications such as Allegra, Clarinex and Zyrtec. Observers expect a similar phenomenon when Prilosec, one of the nation's top-selling heartburn treatments, goes over the counter this fall.
Meanwhile, hospital utilization has dropped in recent months as workers have put off some elective treatments while the economy remains sluggish, experts said. Case in point: HCA, the nation's largest hospital chain, posted a 31% drop in second-quarter earnings and reduced its full-year outlook last month, after the slumping economy and rising unemployment stunted the company's admissions growth and increased its bad debt.
As a result, insurers' premium increases are now fast outpacing growth in spending on patient care. Health Net, the latest insurer to announce its financial results, spent 83.6% of its second-quarter premium dollars on medical care, down from 84% a year earlier. Aetna's medical-cost ratio improved even more dramatically, falling to 77.3% in the second quarter from 85.1% a year before, as it boosted premiums between 13% and 14%.
Proof is in the profits
The payoff in controlling costs is evident in earnings reports. Health Net's second-quarter profits climbed 15% to $75 million, or 63 cents per share. The Woodland Hills, Calif.-based insurer now expects to earn between $2.63 per share and $2.67 per share for the full year, up from its prior projection of between $2.56 per share and $2.60 per share.
Aetna, after posting a 28% jump in second-quarter net income to $138.4 million, or 87 cents per share, also raised its full-year guidance. The Hartford, Conn.-based insurer is projecting 2003 earnings of between $5.55 per share and $5.70 per share, compared with a previous estimate of between $4.75 per share and $4.90 per share.
The gains aren't escaping providers' notice. Emory Healthcare in Atlanta, for instance, threatened to sever ties with Aetna in April and used Aetna's strong financial growth as leverage at the bargaining table. Last month, the two parties hammered out a new, four-year contract with significant rate increases for the healthcare system's three hospitals.
Even Sutter Health, which says it doesn't figure insurers' profits into its contract talks, "is following with great interest the financial successes being experienced on the payer side," Sutter spokesman Bill Gleeson said. The Sacramento, Calif.-based hospital chain has enjoyed strong growth in recent years, thanks in part to its hardball negotiating tactics.
"A number of factors are finally starting to have a tempering effect on the rate of healthcare inflation, and that's having an impact on (insurers') bottom lines," said Eric Veiel, director of equity research at Wachovia Securities, Charlotte, N.C. "Of course, utilization is a wild card, and if the economy picks back up we won't see continued deceleration there. But we won't return to the high rates of (medical cost) increase we saw in 2001 and 2002."
That doesn't mean insurers will be any less interested in controlling medical costs, in which provider reimbursement levels are a key factor. Providers' gains may hinge on market power, something many hospitals built up in the 1990s through mergers and acquisitions.
However, Veiel and others said they expect employers and consumers to benefit from lower premium increases starting next year. Exactly how much lower will depend on if "there are enough insurers willing to stick their necks out (by moderating prices) this year and put competitive pressure on others to do the same," said Paul Ginsburg, president of the Center for Studying Health System Change, Washington.
A few insurers already are attempting to pass the benefits of slower medical cost growth on to customers. This month, for example, Blue Cross and Blue Shield of Tennessee reduced its base group rates for new and renewing customers by between 3% and 8% to reflect the declining growth in medical costs that it has enjoyed over the past 18 months, says Bill Steverson, spokesman for the not-for-profit health plan.
The rate rollbacks are an effort "to move the pendulum back to the center after swinging a little bit too far in one direction. We're trying to keep a balance," Steverson said.
Health Net, whose premium increases averaged 13.2% in the second quarter, also expects to begin scaling back its rate increases by 2005, once it ascertains that medical inflation is truly moderating over the long term.
"We know Americans can't tolerate year after year of double-digit premium hikes," said Health Net President and Chief Executive Officer Jay Gellert. "Our goal is to ultimately translate whatever savings we see (from an abatement in medical-cost trends) into greater affordability for our members and better access for the uninsured."
Much of that effort, though, will depend on Health Net's ability to keep provider payment rates and utilization in check, Gellert said. "We're working very closely with all the people on the care side to reduce costs," he said.
Too early for rate cuts
For now, most insurers say it's far too soon to think about rate cuts. Health plans are wary of landing in the predicament they found themselves in the mid- to late 1990s, when many slashed prices to gain market share only to end up in financial trouble. Most have battled back to steady profitability after six years of accelerating premium increases, and they don't want to change course too soon.
"It's premature to say with any certainty that this is the start of a long-term trend," healthcare analyst Peter Kongstvedt said of slowing medical cost growth. In the insurance business, "you set your premiums, and then you have to live with them for the next 12 months," said Kongstvedt, vice president of Cap Gemini Ernst & Young. "So just because you see some downward pressure on costs, you're not going to immediately start cutting your rates."
PacifiCare plans to boost commercial rates by about 18% through the rest of the year and by about 17% in 2004--far more than its competitors, which are averaging 14% to 15%. The Cypress, Calif.-based company, which is at the tail end of a multiyear turnaround, nearly tripled its second-quarter net income to $73 million, or $1.92 per share, as it chopped its medical-loss ratio to 83.8% from 87.5%. It now expects 2003 earnings of $6.45 per share to $6.55 per share, up from a prior estimate of $4.35 per share.
PacifiCare officials were not available to comment for this article, but the company provided a transcript of a recent CNN interview with PacifiCare President and CEO Howard Phanstiel. In it, Phanstiel explained that the company's premium increases have been coming off a small base "that had pricing that was a little bit low, and we had room to move pricing up. That was an important part of our turnaround."
Many insurance executives say the weak economy remains as much of a challenge for health plans as for hospitals, evidenced by slowing membership growth resulting from reduced demand for coverage.
Indeed, analysts expressed concern over UnitedHealth's "modest" 5% membership growth in the second quarter, even as the Minneapolis-based insurance giant posted a 35% jump in net income to $439 million, or 71 cents per share, and a 10% operating margin. Meanwhile, Oxford Health Plans--which this month reported a 37% gain in second-quarter net income to $72.5 million, or 85 cents per share--saw its stock price slip as much as 14%, largely on news that its membership dipped 2.1% to 1.57 million members.
"The economy continues to be our primary challenge," Oxford President and CEO Charles Berg said. "Fewer new customers are available to us because fewer small businesses are being started, with fewer offering insurance. We're also seeing the effects of layoffs as the soft economy takes its toll on the mid- and large-group markets."
Oxford plans to maintain rate increases of about 11%, slightly higher than last year, even as the growth in the company's medical costs has slowed to about 9.6% from 11% in 2002, Berg said. "It seems reasonable to conclude that medical trends have plateaued," he said. Yet "our financial performance is highly dependent on adhering to our commitment to disciplined pricing."
Industry observers said they are awaiting the inevitable reversal of the insurance underwriting cycle, when health plans, many of which have been dropping low-margin clients to boost profitability, once again have to lower premiums to compete for market share.
Employers' patience crumbling
There are signs employers are nearing a breaking point.
The California Public Employees' Retirement System, the nation's second-largest purchaser of healthcare with 1.25 million members, dropped PacifiCare and Health Net from its HMO list this year after the insurers proposed rate increases of 41% and 39%, respectively (May 13, 2002, p. 32). Meanwhile, small businesses are lobbying fiercely for a bill that would allow them to pool together through trade organizations to negotiate better rates. Such association health plans could usurp high-margin, small-group business from traditional insurers.
Health plans and hospitals have been trading blame for months over the nation's rising healthcare costs. Insurers point to new hospital construction and rising treatment costs as key drivers of the trend. On the other side, the American Hospital Association and the Federation of American Hospitals recently released a 43-page report citing insurers' growing profitability as a primary factor (April 14, p. 18). The report followed a study released earlier this year by the Blue Cross and Blue Shield Association showing that a smaller portion of premiums is going to the payment of medical claims while profit margins have expanded (March 3, p. 15).
"(Insurers' current financial) situation proves out what we've been saying all along. ... Healthcare costs have a lot to do with their cyclical practices, premium increases and profit-taking," said Carmela Coyle, the AHA's senior vice president of policy.
Ironically, providers may be playing an inadvertent role in insurers' recent profit gains.
Some industry observers suggest that doctors and hospitals may be filing claims more slowly or conservatively in the wake of increased federal scrutiny of provider billing practices.
Others assert that health plans' bottom lines have plumped up partly because providers often don't pursue full reimbursement for services. To keep administrative costs in check, most hospitals do not refile denied claims that fall below a predetermined value, often $500. These "small balance" write-offs, in turn, leave millions of unclaimed dollars sitting in insurers' bank accounts, said Foster North, president and chief operating officer of Third Millennium Healthcare Systems, a Decatur, Ga.-based company that develops claims-handling software.
As for the current Medicare reform debate, the influence of insurers' improved financial picture is unknown. Bill Vaughan, director of government affairs for Families USA, Washington, said he hopes insurers' earnings don't go unnoticed by federal policymakers.
The Bush administration is pushing for a greater role for private insurers in a modernized Medicare system, asserting that the private market is more efficient than the government. Insurers, fearful of losing their fortunes in the new venture, want greater flexibility and higher payments under the Medicare system before they commit.
Vaughan contended that insurers' growing profits are proof privatization isn't the way to go. "People say these plans are more cost-effective than traditional Medicare, but they clearly aren't when you factor in all that they spend on marketing, agent commissions, executive compensation and profits," he said.
Indeed, a new Commonwealth Fund study also questions private insurers' efficiency, noting that beneficiaries' out-of-pocket premiums under Medicare+Choice have continued to climb (See related story, p. 7).
Others expect insurers' earnings gains to have little bearing on the Medicare talks.
"Congress will be focusing mostly on Medicare plans, and it's pretty apparent they aren't making much money," said Ginsburg of the Center for Studying Health System Change. In fact, he said, one reason insurers' profits are so strong is that they've exited many Medicare markets.
Health Net CEO Gellert said insurers' financial strength should work in their favor. Health plans' average after-tax profit margin is now about 3%, a figure he called "solid but not excessive."
"(Insurers) have finally gotten to the point where we're financially secure and stable," Gellert said. "Policymakers don't want to entrust the healthcare of millions of senior Americans to companies that ... could go out of business. It gives them the confidence that we can be in it for the long haul."
What do you think? Write us with your comments. Via e-mail, it?s [email protected]; by fax, dial 312-280-3183.