Some analysts are warning that the health insurance industry has peaked. Tell health insurers that.
The third quarter continued to be one of soaring profits and expanding margins for health plans nationwide, a payoff from higher premiums and an easing in the speed of medical cost growth.
Anthem enjoyed a 5% profit margin in the third quarter as net income climbed 23% to $242.1 million on $4.8 billion in revenue. WellPoint Health Networks, which plans to merge with Anthem, did even better. Its third-quarter profit margin reached 5.4% as earnings rose 28% to $315.1 million on revenue of $5.85 billion.
And the double-digit gains haven't been limited to the largest insurers. Coventry Health Care's third-quarter earnings rose 29% to $87 million, and Sierra Health Services' rose 38% to $30.7 million. Their margins reached 6.5% and 7.8%, respectively. Even Medicaid managed-care plan Amerigroup Corp. expanded its third-quarter profit margin to 5.2% from 4.4% a year earlier, as earnings climbed 34% to $24.3 million.
The results build on 2003, when the nation's health insurers raked in combined profits of $10.2 billion, nearly twice the $5.5 billion earned in 2002 and 14 times the $736 million earned in 1999, according to Weiss Ratings. The industry's profit margin climbed to 3.8% from 0.38% over the five-year period.
Among the top 17 publicly traded health insurers, net income averaged $414 million last year, up 115% from $193 million in 2000, according to CBS MarketWatch. Their average margins doubled to 5% in the same period.
And if insurers' latest financial results are any indication, the growth is likely to continue, at least for a while. UnitedHealth Group, the nation's largest health insurer and long considered an industry bellwether, last month reported a 47% increase in third-quarter net income, to $698 million, on $9.86 billion in revenue. Its net margin widened to 7.1%, from 6.8% in the second quarter and 6.6% in the year-earlier period.
The industry's profit margins have expanded as insurers increased premiums well beyond cost trends while reconfiguring their health plans to shift more costs onto consumers.
"Basically, they're bringing in more and paying out less," said Weiss senior analyst Donna O'Rourke.
Last year, premiums rose an average of 15%, more than twice the 7.4% increase in the cost of providing healthcare to privately insured individuals, according to the Center for Studying Health System Change.
Spending increases have slowed from 9.5% in 2002 and 10% in 2001 as the surge in demand that followed the loosening of managed care has ebbed and employers' cost-sharing efforts have discouraged use. "Higher copays and deductibles are forcing people to use less services," spokeswoman Alwyn Cassil said.
Among the 17 publicly traded insurers tracked by CBS MarketWatch, the percentage of premium dollars devoted to actual medical care dropped to an average of 81.5% last year from 84.8% in 2002. The bulk of the rest of their revenue-or an average of 13.5% in 2003-went to cover administrative costs, including salaries and advertising.
Some insurers have also padded their margins by shedding their least-profitable accounts. Aetna, for example, dropped 8 million members from 1999 to 2003; while its revenue fell 33%, its profits climbed 635% to $934 million from $127 million and its margins leapt to 5.2% from a razor-thin 0.5%. Aetna reported third-quarter net income of $1.29 billion on revenue of $5 billion-or a 26% profit margin-because of a one-time, $740 million tax refund and favorable tax-reserve adjustments of $250 million. Its operating earnings rose 38% to $275.5 million, for an operating margin of 5.8%.
Insurers' fortunes have come as more Americans have joined the ranks of the now 45 million uninsured and a growing number of small businesses have dropped coverage because of high costs. Some 65% of companies with fewer than 200 workers offered health benefits last year, down from 71% in 1999, according to the Kaiser Family Foundation.
Insurers argue that they're playing catch-up after the late 1990s, when the industry lost a combined $530 million in 1997 before returning to the black in 1999, O'Rourke said.
Premium increases are expected to slow to 12% next year, according to consultant Towers Perrin. But analysts remain split on whether the pricing cycle is heading into a downturn that could squeeze industry margins.