Health insurers, including health maintenance organizations, have suffered from a lingering financial sickness this year.
The industry has seen profits weaken as several big players, including UnitedHealth Group Inc., which has a major presence in Cypress, scuffle with economic and competitive pressures. Those pressures include falling enrollment in profitable business accounts for which managed care assumes the full insurance risk, rather than sharing it with the client.
In addition, some companies have mispriced their plans and reported unexpectedly higher medical costs, thanks to a punishing winter flu season that sent more people to the hospitals than usual.
In particular, observers say, the publicly traded portion of the industry has taken a hit.
“It is struggling. Stock values have dropped on average by about 40% from Jan. 1 to today,” said Paul Drogosch, a partner in the Los Angeles office of Deloitte & Touche LLP.
Minnetonka, Minn.-based UnitedHealth’s stock is down 46% so far this year. Health Net Inc., based in Woodland Hills, is down 43% from the beginning of the year. Indianapolis-based WellPoint Inc., parent of Anthem Blue Cross of California, is down 37%, while Aetna Inc. of Hartford, Conn.,which some call a “classic best house in a bad neighborhood”,is down 23%.
Some on Wall Street say that health plans may be in for more bumpiness ahead.
“Value investors, I know, are itching to pull the trigger here and invest, but I would recommend a very, very cautious approach to the group at this time,” Sheryl Skolnick, a senior vice president and managed care analyst for CRT Capital Group LLC of Stamford, Conn., told Dow Jones Newswires.
Earlier this year, UnitedHealth said its results would be pressured by market issues and that more health insurers would be lowering their expectations for 2008.
“We have trouble believing that this is a company-specific trend,” Joshua Raskin, a Lehman Brothers analyst, wrote after UnitedHealth’s announcement.
In terms of some specific issues affecting insurers, mispricing came in, Drogosch said, on products like Medicare Advantage, the HMO form of the Medicare federal health insurance program for senior citizens, as well as drug benefit plans that were created by Medicare reform that was signed into law five years ago.
“They are experiencing a lower margin from Medicare Advantage, from the Part D program,” he said. “That didn’t help them with pricing on their other standard, fully insured commercial products either.”
In addition, “nobody would have anticipated the economy going the way it went in late 2007, early 2008. So what you saw in (the first quarter) was warnings being issued by every one of the public companies,” Drogosch said.
HMOs were also hit with increased medical costs because of an intensified winter influenza season, which drove usage up.
Options
The situation has basically forced health maintenance organizations into two losing options: either lower their premium costs to retain business but risk losing money or keep premium costs up and risk losing business.
For example, UnitedHealth chose to keep its premiums up,something that is going to result in the projected loss of 800,000 members this year, although the company said in a statement that some of that loss includes about 100,000 members converting to other plans within the UnitedHealth umbrella.
UnitedHealth’s OC HMO membership declined 22% to some 180,000 people. UnitedHealth upped its OC presence when it bought PacifiCare Health Systems Inc. for $9.2 billion in 2005.
“Our commercial business remained soft in the second quarter due to low employment levels, intense economic pressure and strong competition,” the company said.
UnitedHealth believes it can improve its commercial performance by taking a more local approach in marketing, saying that market structures, cost positions and competitors vary region to region and may require different approaches.
UnitedHealth has reduced its operating regions from six to four and appointed Steven Nelson as chief executive of the West. It also is cutting 4,000 jobs companywide. The state Employment Development Department’s Web site shows that UnitedHealth filed a notice saying that it was letting go of 71 workers in Cypress, effective today.
UnitedHealth is not the only health plan that’s seen some slowdowns.
“Growth has slowed a little bit from what it was in 2007 due mainly to the downturn in the economy. But even with that, we continue to experience growth, so we haven’t shrunk,” said Beth Andersen, a Walnut Creek-based vice president of small and middle markets for the Western region of Aetna, which has 52,840 HMO members in Orange County.
“That’s the good news, but the growth won’t be as fast as it was in 2007 and the beginning of ’08,” Andersen said.
Competitive Pressures
Aetna may be able to gain market share from some of its competitors, but analyst Skolnick said it could eventually face the same competitive pressures from not-for-profit insurers and the reality that health insurance is too expensive for many people.
“Employers are trying to find cheaper alternatives,” Drogosch said. “Right now, for various tax reasons and other reasons, some have determined that self-insuring versus fully insuring is a cheaper alternative.”
Late last year, a study from Hewitt Associates LLC, an Illinois-based human resources services company with an office in Newport Beach, projected that OC employers were expected to pay 8.7% more in average in healthcare costs this year.
Analysts also have said that large public managed-care companies have been hit by competitive pressure from not-for-profit plans such as Kaiser Permanente, part of Kaiser Foundation Health Plan Inc.
“The not-for-profits have an advantage here because they don’t have the pressures that the for-profits have from their shareholders,” Drogosch said. “You don’t know exactly how they are doing but they don’t need to have the same return. They’re accountable to management or to the community, so they can work off a lower margin.”
Oakland-based Kaiser, which differs from many of its commercial competitors in that it treats its members through its own hospitals and closely affiliated medical groups, is the largest HMO operating in OC with more than 380,000 members.
Kaiser, which just opened a large hospital in Irvine, has more than doubled its OC enrollment since the 1990s.
“Once we get access to a group and start to build a rapport and a good relationship with the members, then that word spreads,” said Julie Miller-Phipps, a Kaiser vice president and OC service area manager.
Their good relationships include one with Santa Ana’s Advanced Medical Optics Inc., an eye surgery device maker that offers Kaiser insurance to its workers.
Political Murkiness
Besides the economic issues and not-for-profit competition, political murkiness lingers over the industry, which, to a certain degree, relies on government money from Medicare and Medicaid plans.
And managed-care stocks took another hit last month when the Senate sent President Bush a Medicare bill that cuts payments to Medicare Advantage HMO plans, overriding previous vetoes.
Although Medicare Advantage boosts revenue and enrollment at some insurers, lawmakers have generally looked at it with a degree of disfavor.
Seniors, however, may end up being the saving grace of the industry.
“The sun will shine again. The baby boomers are getting older and are consuming more and more medical services,” said Vitaliy Katsenelson, director of research at Investment Management Associates Inc. in Denver, in a Forbes magazine article.
Katsenelson predicts HMO stocks will make a comeback because their role is unlikely to diminish in the healthcare industry.
