2nd-quarter surge

Whether it's the lingering aftershock of the Great Recession, stepped-up efforts at cost control by providers or a combination of the two, slow-growing medical claims led to surging profits for big commercial health insurers in the second quarter.

Five publicly traded insurers—Aetna, Cigna Corp., Humana, UnitedHealth Group and WellPoint—easily beat analyst earnings expectations. Most are now boosting their full-year earnings per share projections as they expect moderate cost growth to continue.

Moreover, the prospects for a banner 2014 are growing as lingering doubts about the startup of the federal exchanges dissipate and other coverage expansions contained in the healthcare reform law get underway.

“Put simply, we see an opportunity for profitable top-line growth that, for WellPoint, is more compelling than we have seen in several years,” said CEO Joseph Swedish.

Still, all isn't rosy for the major insurers. Some CEOs sounded the alarm that potential cuts in Medicare Advantage payments would hurt earnings in the future.

All five insurers saw their net income rise in the second quarter, compared with the prior-year period. Aetna saw its profit jump to $536 million, up from $457 million the same quarter in 2012. Aetna also saw tremendous revenue growth—from $8.8 billion to $11.5 billion—but that was largely the result of completing its acquisition of Coventry Health Care in May. Cigna saw its profit soar to $505 million in the second quarter, compared with $380 million in the year-ago quarter.

The major insurers also saw strong enrollment growth, largely due to the growth in their managed-care programs for Medicare and Medicaid. UnitedHealth remains the insurer with the largest clientele, ending the quarter with 45 million members, up from 42 million in 2012's second quarter. WellPoint, the second-largest insurer based on enrollment, saw its enrollment advance in the quarter to 37.7 million, up from 33.5 million in the second quarter a year ago.

The stellar results across the board were largely the result of lower-than-expected medical costs. Because of the struggling U.S. economy, consumers are visiting providers less often and postponing optional care. Some analysts suggest escalating cost- and quality-control efforts by the nation's healthcare providers are also having an impact. But major insurers reject that view.

“While structural changes in the health system may be playing a modest role in the low-cost trend we are experiencing, we continue to believe that this low utilization is largely driven by the weak economy,” Aetna CEO Mark Bertolini said during an earnings call.

All five major carriers reported that cost increases were more moderate than previously projected. For example, Aetna said medical cost increases in its commercial insurance segment would rise 6% this year; WellPoint estimated 6.5%; and Cigna projected medical costs increasing between 5% and 6%, which is a percentage point less than previous estimates.

UnitedHealth Group CEO Stephen Hemsley, during an earnings conference call with analysts last month, warned that continued funding cuts to Medicare Advantage and some provisions of the Patient Protection and Affordable Care Act could negatively affect the bottom line next year.

On the other hand, other insurers are boosting their exposure to government-funded insurance programs being turned over to the private sector. Aetna's $6.9 billion purchase of Coventry last year gave it a much larger share of the state-run Medicaid managed-care market as well as expanded its Medicare Advantage presence.

Looking ahead, CEOs of most of the larger insurers remain bullish going into 2014 when exchanges will be up and running and providing millions of new customers.

Bruce Broussard, CEO of Humana, the country's second-largest provider of private Medicare plans, said he anticipates membership growth in the company's Medicare Advantage segment. Yet he echoed Hemsley's concerns about potential cuts in the program as the government struggles to hold down costs.

Those pressures could be seen in the earnings results at smaller insurers that focus almost exclusively on government programs.

Universal-American Corp., which specializes in offering Medicare Advantage plans, reported a quarterly loss due to a higher Medicare Advantage medical-loss ratio and a soured acquisition of APS Healthcare, a case-management and utilization-review firm that caters mostly to Medicaid programs.

Chairman and CEO Richard Barasch said in a statement that the company is working to improve its Medicare Advantage business. But it took a $90.6 million hit related to its

$227.5 million acquisition of APS. “Taking a write-down of the goodwill associated with APS Healthcare is a recognition that the deal has not worked out the way we had expected,” Barasch said.

Follow Jonathan Block on Twitter: @MHjblock