Higher medical, drug costs could slow down insurers' profit run

Rising medical and prescription drug costs could crimp the health insurance industry's strong revenue and profit growth.

The Altarum Institute's Center for Sustainable Health Spending estimated that spending on hospital care jumped 9% from February 2014 to February 2015. That's a “giant” increase, said Paul Hughes-Cromwick, a senior health economist at Altarum. By contrast, hospital spending climbed only 3.1% from February 2013 to February 2014.

Deutsche Bank's hospital volume tracker also showed more inpatient discharges across commercial, Medicare and Medicaid patients, said Scott Fidel, a health insurance analyst at Deutsche Bank.

And last week, HCA, the nation's largest for-profit hospital operator by revenue, said it expects a 5.1% increase in same-facility admissions for the first quarter, and a 6.8% increase for same-facility equivalent admissions, which include outpatient activity. HCA's same-facility emergency department visits rose 11.5% over the same quarter in 2014, according to preliminary estimates.

Other for-profit hospital companies are also expected to report strong growth in the first quarter, thanks to a rebound in the economy, more paying patients as a result of the Affordable Care Act, and strategies to expand outpatient reach.

If growing medical costs turn out to be a broader trend, insurers will be paying more in medical claims to hospitals and health systems—leaving less cash for their own coffers and bucking the trend of the past four years when the U.S. healthcare system saw historically low spending growth.

That shift could trim the extremely bullish expectations for the health insurance industry.

“It is hard for us to see how, with these types of volume numbers from HCA, overall healthcare utilization did not increase during the (first quarter),” Fidel wrote in a research note. “We do see the HCA pre-announcement as a cautionary data point for managed care.”

Sheryl Skolnick, a managing director at Mizuho Securities USA who tracks UnitedHealth Group and HCA, said she hasn't seen that kind of inpatient volume growth in the hospital sector in 10 years. “It is not unprecedented, but it is highly unusual,” she said.

But Megan Neuburger, a managing director with Fitch Ratings who follows the for-profit hospital industry, predicted the pace of inpatient care growth won't last. Insurers and cost-sensitive patients will continue to seek less-expensive care outside of hospitals. “I don't think HCA will keep that up,” she said.

Besides signs of higher hospital utilization, spending on prescription drugs rose by 13% in 2014, driven largely by increased spending on new breakthrough medications, according to a report issued last week by the IMS Institute for Healthcare Informatics. Medicaid patients' spending on drugs rose much faster in states that expanded Medicaid under the ACA, compared with those that did not, the report found.

UnitedHealth Group remained immune from those burgeoning medical cost trends, at least in the first quarter. The insurer and health services company said last week that its medical-loss ratio, which represents the percentage of premium dollars spent on medical care, actually decreased year over year from 82.5% to 81.1%.

UnitedHealth's lower MLR, paired with HCA's increased volumes, appears contradictory. But it could reflect two separate factors. United and HCA could be gaining market share in geographic areas where they don't overlap, Skolnick said.

In addition, UnitedHealth, like other insurers, continues to impose greater out-of-pocket costs on patients through higher deductibles, coinsurance and copays.

“In the first quarter, there has not been any acceleration in underlying utilization,” UnitedHealthcare Chief Financial Officer Dan Schumacher said. “I think we've done well as an organization through our focused medical cost-management initiatives, and also I think we're seeing benefits from greater consumer responsibility.”

There's still a chance other insurers will not report similar favorable medical-cost trends when they release first-quarter earnings over the next few weeks.

Some insurers, such as WellCare Health Plans and Molina Healthcare, primarily cover Medicaid patients and Medicaid-Medicare dual-eligible beneficiaries, which include sicker enrollees. In addition, more Americans have subsidized coverage under the ACA, which likely will lead to more hospital and doctor visits and more claims.

But potentially higher healthcare spending won't immediately imperil insurers, as cash flows and reserves could offset any large swings in patient behavior. “Reserves seem to be very high, and I'm pretty certain there's some give before (insurers) would see a big hit to profitability,” Hughes-Cromwick said.