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Health insurance firms' earnings improve on low utilization


The nation's biggest publicly traded health insurers significantly outperformed market expectations in 2011, principally on the strength of lower-than-anticipated utilization rates and medical costs.

Collectively, total 2011 revenues for the seven largest U.S.-based managed care companies grew by 4.6% over results from 2010 to $278.4 billion. Net income for the group increased 7.6% over the prior year to $13.2 billion, while enrollment grew 3.2% over 2010 to 118.6 billion lives.

“Coming into the year, we expected earnings to be down for the most part, but instead they grew pretty robustly in most cases,” said Matthew Coffina, an equity analyst at Chicago-based Morningstar Inc.

Insurers and analysts had expected utilization rates and medical costs to increase last year as the country's job market slowly began to improve, and had planned for significant regulatory pressure on earnings, particularly in the form of minimum loss ratio requirements built into the health care reform act.

Both predictions turned out to be off the mark, analysts said.

Though some companies reported modest increases in utilization in the second half of 2011, medical claims on the whole remained depressed despite improvements in the job market.

Analysts attributed this to employees still contending with economic challenges, as well as longer-term shifts in health care management and cost-sharing trends.

“It's possible that we're reaching a tipping point in terms of health care affordability, both for employers and employees,” Mr. Coffina said, noting that employees are generally taking on more of the financial burden for their own health care expenses as employers look for ways to mitigate the effect of rising treatment costs.

“That could keep utilization depressed more than you might otherwise expect,” Mr. Coffina said.

Another factor potentially impacting utilization trends is an increased focus among employers and insurers on wellness, behavioral changes and preventive health management.

In a conference call with analysts and investors, Minnetonka, Minn.-based UnitedHealth Group Inc. President and CEO Stephen Hemsley said nearly a million of its members had enrolled since 2010 in the company's Personal Rewards programs, which offer financial incentives for certain “healthy actions.”

“Consumer engagement is central to our health benefits value proposition because improving patients' decisions, whether related to lifestyle or access to care, is critical to their total health,” Mr. Hemsley said.

Analysts said the industry also misjudged the degree to which the implementation of minimum loss ratios mandated by the Patient Protection and Affordable Care Act would affect earnings.

Given lingering uncertainty over exactly how the ratio floors—80% for small employer groups and individuals and, beginning in 2014, 85% for large employer groups—would be calculated, many companies implemented consolidated loss ratio minimums at a lower percentage than required and set aside retentions for premium rebates, analysts pointed out.

“Because the underwriting results were better than expected—although the MLR requirement changed the internal metrics for the companies, overall—there were wide enough profit margins that it didn't slow down growth,” said David Shove, a BMO Capital Markets analyst in New York.

Among market leaders in the health care industry, analysts said Louisville, Ky.-based Humana Inc. submitted one of the more impressive year-end reports, owing largely to a business model weighted heavily toward Medicare Advantage (see story, page 17).

“Humana was a tremendous performer in 2011,” said Jason Gurda, an analyst with New York-based Leerink Swann L.L.C. “It's mostly a product of their coordinated targeting of Medicare Advantage, which is an increasing focus of everyone in the industry.”


Humana in 2011 reported a 9.6% increase in revenues to $36.8 billion, an 8.7% increase in enrollment to 11.2 billion lives and a 29.2% boost in net income to $1.42 billion, leading the largest seven U.S. health insurers in all three categories.

In a conference call with analysts and investors, Humana Chairman and CEO Michael McCallister attributed the favorable results to a lower year-over-year consolidated benefit ratio in the company's retail segment, higher average Medicare membership, and higher earnings in the company's Health and Well-Being Services segment.

“Having completed 2011 with record earnings, revenues and health plan membership, we look forward eagerly to continuing our transformation from a product-focused health benefits company to a customer-focused health care company,” Mr. McCallister said.

In the coming year, analysts said much of the industry's attention likely will be focused on Washington, where the constitutionality of key elements of the health care reform law will be argued before the U.S. Supreme Court.

Additionally, just as it did last year, the ongoing congressional debate over deficit reductions is likely to include some discussion of a reduction in Medicare and Medicaid reimbursements.

However, analysts said, insurers' 2012 earnings are not likely to respond significantly one way or the other to political or legal developments.

Rather, they said, the industry's financial performance in 2012 will be generally favorable without a sharp uptick in hiring or abatement in recent pricing, cost-sharing and health management trends.