The earnings consensus among the big health insurance players predicts a healthy second quarter with few surprises, despite financial pressures from fees, rate cuts and higher drug costs, as well as potential risk from a new population gaining coverage under the Patient Protection and Affordable Care Act.
“I think the companies were pretty good about describing what they anticipate for the second quarter,” said Steven Halper, managing director at FBR Capital Markets. “We would expect a little bit of an increase in the utilization and perhaps some slightly higher loss ratios in the aggregate, but nothing out of the band of expectations.”
One of the first tests of that prediction may be seen July 17 when UnitedHealth Group Inc., the bellwether for the health insurance market, as well as the largest health insurer in the country, with more than 85 million members, reports its quarterly earnings. Three months ago, the Minnetonka, Minnesota-based firm told investors that first-quarter earnings had fallen 7.8% to $1.1 billion from $1.19 billion in the year-ago period. That came despite a 4.6% increase to its top-line revenue.
However, one insurer's earnings, no matter how large, do not necessarily foreshadow results for the rest, said UBS analyst A.J. Rice.
“Each of these companies has a different set of business mix, so one may not necessarily translate to all the others,” Mr. Rice said.
As the largest provider of Medicare Advantage plans, the ACA and sequestration funding cuts affected UnitedHealth in the first quarter more than some of its peers — by 35 cents per share, according to company estimates. Humana, another big player in the Medicare market, also suffered from those cuts. But Mr. Rice expects a more positive second quarter for the two insurers.
“We don't sense that anything has gotten worse,” he said. “We expect them to at least meet analyst expectations.”
For UnitedHealth, that would mean second-quarter earnings per share of at least $1.25, still down year to year, but up from $1.10 last quarter, even with continued operating pressures.
“Commercial pricing pressure is being more acutely felt by UnitedHealth, and we believe the number of states cited as competitive is likely to increase,” according to a report published by Sterne Agee analyst Brian Wright.
But UnitedHealth's rapidly expanding Optum health services platform could help offset rate pressure, particularly in places like New York, where the insurer has highlighted intensifying competition. Optum's revenue was up 29% for the first quarter, and its reputation received a major boost after the business unit played a pivotal role in helping to fix the Healthcare.gov exchange website. Optum's contributions are anticipated to continue, while cost pressures from the expensive hepatitis C drug Sovaldi are a bit of a wild card.
“Sovaldi cost may have improved a little bit,” Mr. Rice said, referring to the drug approved by the U.S. Food and Drug Administration in December for treating liver disease that can run in excess of $80,000 for a 12-week course of treatment.
During the first three months of the year, UnitedHealth indicated that it had spent about $100 million on the drug in its Medicaid, Medicare and commercial businesses.
Meanwhile, WellPoint Inc. has called Sovaldi its “biggest watch item,” budgeting $100 million of additional hepatitis C drug costs to its 2014 outlook after spending close to $50 million on it during the first quarter.
“Any update on Sovaldi and how that's going will be a big topic,” Mr. Rice said.
When Aetna reported its first quarter results in April, Shawn Guertin, the company's chief financial officer, told investors that the Hartford, Connecticut, insurer had spent $30 million on what has been labeled the $1,000 pill. Even so, enrollment growth, improvement in its medical-loss ratios, and an inorganic revenue boost from the acquisition of Coventry Health Care, Bethesda, Maryland, helped lift the insurer's earnings above expectations.
“I think for Aetna, look for more of the same,” Mr. Rice said. Halper agrees, calling Aetna “in a good place for 2014.”
Instead, questions about performance may be swirling more around Louisville, Kentucky.-based insurer Humana Inc. As the fourth-largest insurer in the country based on total direct premiums, Humana got off to a rocky start for the year, as higher expenses and federal Medicare cuts ate away at its profits. Earnings per share in the first quarter were down 60 cents on a year-to-year basis. But for the second quarter, as well as the full year, Humana could benefit from what has been an aggressive push into the Medicare Advantage market.
Humana has been taking advantage of UnitedHealth and WellPoint's decisions to shrink their footprints in this sector. At the end of the first quarter, Humana raised its Medicare Advantage membership growth estimate from 395,000 to 435,000. At the same time, it has been a big player in the individual-market exchanges, offering products across 14 states. Indianapolis-based WellPoint, the nation's second-largest health insurer, has also been selling plans on the exchanges in 14 states. When it reported its first quarter earnings, it raised its earnings-per-share expectations as a result, to greater than $8.40 for the year.
“Our membership is growing across our platforms and we are pleased with the progress we have seen in the exchanges,” Joseph Swedish, WellPoint's chief executive officer, said in a release. “We are off to a strong start, supporting an increase in our earnings guidance for the full year.”
Rachel Landen writes for Modern Healthcare, a sister publication of Business Insurance.