News Item: Managed Care Company Profits Healthy, but Higher Costs Loom

On November 9 Reuters reported that healthy third-quarter profits show most U.S. managed care companies remain a step ahead of rising medical costs, but a slowing economy will make it tougher for insurers to raise premiums and grow enrollment going forward, analysts said.

“It’s the one sector of health care that is most affected by the weakening economy,” said Banc of America Securities analyst Todd Richter. “A weakening economy means rising unemployment, which means more people uninsured, which means less enrollees.”

Two large health plans, Health Net Inc. of Los Angeles and Trigon Healthcare Inc. in Virginia on Friday reported sharp declines in third-quarter income after charges.

Health Net, with 5.5 million members in 13 states, said net income fell to $2.3 million, from $44.6 million a year ago, after a $79.7 million restructuring charge for job cuts.   Trigon, Virginia’s largest health insurer, said net income fell nearly 54 percent as weak financial markets hurt the company’s investments.  But profits excluding special items rose for both companies and were in line with analysts’ consensus estimates.

Health Net and Trigon were the last of the major publicly traded health maintenance organizations to report their third-quarter results, with the exception of Anthem Inc., which went public on October 30 in a $1.73 billion offering. [Anthem reported earnings on Wednesday and is included elsewhere in this issue.]

HMO Premiums Rise Faster than Health Costs

Most HMOs this year negotiated hikes in the premiums paid by employers that outpaced increases in costs for physicians, hospitals and pharmaceutical services.

The cost of large employers’ health benefit plans will increase about 14 percent on average in 2002, the highest year-over-year rise in more than a decade, according to a survey released this week by consulting firm Towers Perrin.

Higher premiums resulted in solid profit growth for most managed care companies in the latest quarter that largely met or beat Wall Street forecasts.

WellPoint Health Networks Inc., UnitedHealth Group Inc., Humana Inc., Coventry Health Care Inc. and PacifiCare Health Systems Inc. all reported operating profits in excess of 20 percent.
Cigna Corp., the third-largest HMO, reported lower earnings, but the decline was smaller than analysts had expected.

Only one major health insurer, Aetna Inc., recorded a loss in the third quarter. Aetna, the largest managed care company, said it lost $54.4 million as it continued to pare membership in unprofitable government-sponsored plans.

However, with the economic downturn reversing the fortunes of companies across a wide swath of industries, from technology to manufacturing to financial services, managed care providers will be hard-pressed to match the rate increases that have helped provide tidy profits this year, analysts said.

Employees to Pay More

“We think employers will push back, they will want to buy cheaper products. We think margins in the industry, which are already at peak levels, must turn down in ’02,” said Credit Suisse First Boston analyst Joseph France.

Trigon Chief Executive Thomas Snead said most of Trigon’s customers have been purchasing the company’s benefit-rich plans, but more will switch to lower-cost plans with fewer frills as medical expenses continue to rise. “New cost-sharing products are beginning to sell quite well,” Snead said in an interview.

While concerns about earnings growth in the second half of 2002 have dampened investor enthusiasm for the managed care sector as a whole, some companies will continue to produce results that outshine their peers, analysts said.

Employers are considering a number of measures to control rising health expenses, including passing on more of the costs to employees in the form of higher monthly contributions, deductibles and co-payments, according to Towers Perrin.

Escalating medical costs have been a persistent challenge for the HMO industry, prompting premium hikes and service cutbacks for consumers and forcing numerous smaller and less profitable plans to dissolve or merge in recent years.