Health insurers will likely see falling medical cost claims in the coming months and minimal exposure to the credit crisis gripping Wall Street, but a wider recession could hurt employer-sponsored enrollment, leading to higher premiums, analysts said.
Major insurers have been on a roller-coaster ride this year that only accelerated in recent weeks with market volatility. The Standard & Poors 500 Managed Health Care Index has fallen about 25% this year.
Health insurers began having problems in March, when several reduced earnings guidance because of higher-than-expected medical costs, a severe flu season and overpriced products. Indianapolis-based WellPoint adjusted earnings downward for the first time, sending shock waves through the industry.
Since then, managed-care companies have raised premiums, ditched underperforming or risky products, such as Medicare private fee-for-service plans, and are now enjoying lower medical claims costs, several analysts said.
Medical costs are dropping like a stone, said Dave Shove, senior research analyst at BMO Capital Markets Equity Research Group. Weve seen data from the summer and physician visits are down, hospital beds are empty and prescriptions arent being filled.
While thats bad news for patients forgoing care and for providers who are losing income, its good news for insurers. They underpriced their products in 08, so they overcorrected by raising premiums, then medical costs went down, Shove said. They got lucky.
Premium rates rose by about 8% on average so far this year, while medical costs have risen just 6%, creating a sweet spot, Shove added.
However, UnitedHealth Group, which released its third-quarter earnings last week ahead of schedule to ease investor concerns over the credit crisis, said medical cost trends typically lag two to three years behind an economic boom or bust, and that the insurer hasnt seen major changes since over a year ago.
Panic had reached the managed-care sector out of concern that these companies will face massive write-downs this fall because of investment losses amid the Wall Street meltdown. Major insurers will release third-quarter earnings over the next three weeks.
Two companiesWellPoint and Centene Corp.have announced their third quarter earnings will be negatively affected by the mortgage and banking crisis. WellPoint said last month that it expects to absorb a charge of $214 million on holdings in Fannie Mae and Freddie Mac, the mortgage companies now under U.S. government conservatorship.
On Oct. 14, Centene, a St. Louis-based Medicaid managed-care company, said it would cut third-quarter earnings by 7 cents a share because of investment losses tied to the Lehman Bros. Holdings bankruptcy. The loss represents less than 1% of Centenes nearly $710 million portfolio, and it has about $15 million in remaining exposure to financial services firms.
In late September, Tampa, Fla.-based MD MedicareChoice lost its Medicare Advantage plan contract and was liquidated after the Securities and Exchange Commission froze an investment fund containing the plans $27 million in reserves. Louisville, Ky.-based Humana picked up the plans 16,000 members.
Despite these worrisome announcements, Carl McDonald, senior analyst at Oppenheimer & Co., said health insurers exposure to the Wall Street crisis is minimal. About 85% of WellPoints portfolio is either totally safe or without much risk, McDonald wrote in an investor note.
Even if health insurers see a sharp decline in bond values, these losses wont show up on balance sheets as long as they are receiving interest payments on the bonds, McDonald wrote. It is imperative to understand this concept, because this is the primary reason why managed-care plans will not take major write-downs over the next two quarters, and why plans will not be forced to raise new capital, he wrote.