Health insurance industry feeling bottom line pain

The first quarter of 2008 will be remembered by health plans as their worst financial performance in more than a decade.

While the Standard & Poor's 500 stock index is down 10 percent for the quarter, the managed care sector is off 35 percent. All the major health plans saw their stock prices tumble as the nation's two giants -- WellPoint and UnitedHealthGroup announced lower earnings.

WellPoint also lowered its full-year earnings expectations, followed a day later by UnitedHealthGroup. Cigna also announced much lower than expected earnings.

It's the worst performance since the fourth quarter of 1997, when the sector underperformed by 22.6 percent. The reason in 1997 was increased HMO competition. The reasons for the drop during 2008 are more complicated.

It's a matter of performance versus expectations. The industry has missed expectations with higher loss ratios as a proportion of revenue. The announcements came as a big surprise to Wall Street, which reacted by dropping stock prices in the HMO sector by 40 percent in a single day.

Health care experts say the result is multi-layered: competition from third-party companies that specialize in health accounts, Medicare Part D prescription drug prices and fewer people enrolled in health care plans. Uncertainty in the political arena also lends itself to uncertainty in revenue and stock prices.

In the case of United, growth in some sectors was offset by higher-than-anticipated declines in risk-based commercial business and reduced investment income. The company reduced its full-year 2008 outlook by 10 percent. The reduction includes an impact from unusually high influenza costs and adjustments in revenue growth for commercial markets.

Health care claims and medical inflation also increased faster than the insurance companies increased their rates.

"More people in the market are going after the business that United has," said Steve Berkshire, a professor at Regis University. "That's one reason for the decline. Another is that they've managed to offset costs with big discounts from providers. There's no more room for discounting -- so they have lower profits. You can only pass through so much of the costs."

Competition is fierce. Both Humana and Aetna, smaller plans, announced earnings in line with expectations, but their stock prices still reflected the surprise announcements by the two industry leaders.

The change in expectations for the year is "not acceptable," said Stephen J. Hemsley, president and CEO of UnitedHealthGroup in a written statement announcing earnings for the fist quarter.

"They are due in part to broader economic challenges and in part to our own performance," he said. "We are adjusting our approaches, in particular to strengthen organic growth and address operating costs, to deliver financial performance that more appropriately represents the capacity and potential of our organization."

As the economy tightens and the labor market remains weak, the insurers that offer managed plans could see even lower profit margins.

"Here in Colorado, we've lost some major businesses," Berkshire said. "Those people aren't enrolled in large-group plans anymore. And small businesses, as we've seen, do not offer health insurance as much as larger businesses."

WellPoint's first quarter results show a net realized investment loss of 6 cents a share. The loss represented higher claims from senior business and higher expenses from the consumer segment. Medicare advantage products have "negatively impacted" financial results, the company said.

Cigna announced earnings of 21 cents a share for a net income of $58 million, compared with $289 million or 98 cents a share for the same period last year.

Humana announced earnings at 47 cents a share, slightly higher than expectations of 44 to 46 cents a share. Humana is actually increasing earnings expectations for the year.

While Medicare Advantage led to lower earnings for WellPoint, Humana cites it as a strong performer.

Aetna too, announced earnings in line with expectations, and reaffirmed its full-year expectations. The company attributed its growth to more members, increases in premiums and stable underwriting results.

Insurers with less-than-favorable outlooks for the years have some options to increase both profits and stock prices -- but those options don't look good to the consumer, Berkshire said.

"The choices are to increase premiums, and get rid of high-risk clients," he said. "If people might cost too much money, it's going to be harder to get them insurance. And they're going to be taking a closer look at the procedures -- it's going to be harder to get tests and procedures certified. They're going to look at the cost instead of the medical necessity."

Copyright 2008 Dolan Media Newswires
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