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Managed care growth may keep hikes stable

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With managed care companies rebounding after reporting sluggish first-half profits, commercial health care cost and premium increases remain mainly in the 6% to 8% range with some insurers reporting slightly lower trends.

Several managed care companies reported flat to lower profits earlier this year due to, among other things, the costs related to the implementation of the Medicare prescription drug benefit, but those insurers have since reported earnings growth through the third quarter of the year.

Louisville, Ky.-based Humana Inc., for example, reported a 7.9% drop in profits for the first half of the year, but the company reported a net year-to-date increase in nine-month profits of 41.5% due to higher enrollment in the company's Medicare Advantage plans and new revenues from stand-alone prescription drug plans for Medicare beneficiaries (see chart).

And while CIGNA Corp. reported lower nine-month profits, the Philadelphia-based insurer also saw some moderation from earlier in the year amid an approximately 11% increase in premiums and fees in its health care segment. The company has made noticeable progress in stabilizing its membership base after years of significant declines, which has helped moderate revenue losses. Total medical membership for CIGNA stood at 9.3 million at the end of the third quarter, a 2.8% increase over the prior-year period.

"I think some of the downward movement on their enrollment base is probably history at this stage," said Joseph Marinucci, credit analyst with New York-based Standard & Poor's Corp.

UnitedHealth Group Inc. reported a 28.8% profit increase for the first nine months of 2006, but the Minnetonka, Minn.-based insurer also announced a delay in the filing of its third-quarter earnings report with the Securities and Exchange Commission due to lingering uncertainty over potential earnings charges related to a stock options probe. While the company has substantially completed its internal analysis of a report that found several stock option grants awarded to company executives were improperly backdated, the company is not yet able to determine the final amount of charges that will be included in financial restatements.

The financial restatements, though, are unlikely to have a significant impact on the insurer's profits because any financial changes related to the stock options probe are expected to be mainly non-cash charges, which are often taken in circumstances such as accounting policy changes, analysts say. While a tax bill is likely to emerge from the restatements, it will be a bill that the company will be able to manage, Mr. Marinucci said.

The major issues for UnitedHealth are whether the stock options probe will tarnish its reputation in the market and result in any policyholder pullback, and whether ongoing government investigations and pending lawsuits have any significant financial impact, analysts say.

"We don't see any short-term issues, but long-term there is some concern," said Stephen Zaharuk, vp and senior analyst for Moody's Investors Service Inc. in New York. "Leadership is going to be distracted for a while."

Despite the resignation of UnitedHealth Chief Executive Officer William W. McGuire, General Counsel and Secretary David J. Lubben and a board director (BI, Oct. 23), the company still has key managers in place who understand the business, which may help alleviate some of the uncertainty, Mr. Marinucci said.

While overall nine-month earnings for the managed care sector are fairly strong, medical cost increases continue to hover in a stable range with further deceleration being seen by some insurers amid moderating pharmacy trends, cost shifting to members and benefit buy-downs.

Indianapolis-based WellPoint Inc., for example, said it continues to expect its medical cost trend to be less than 8% with the level of premiums the company receives exceeding the total cost trend for the 12-month period ending Sept. 30.

"The marketplace remains competitive, but we see generally rational pricing, which allows us to achieve targeted margins," said David Colby, chief financial officer for WellPoint. "We remain very disciplined in our underwriting approach and we will not sacrifice margin for market share."

Humana, meanwhile, continues to report decreasing medical cost trends for its fully insured commercial book of business.

The company's commercial medical cost increases are in the 5% to 6% range—down from the 6% to 7% range reported in the first quarter of 2006—with premium yields in line with cost trends.

"The pricing is following trend—trend is moving down," Mr. Marinucci said. Insurers have "been able to do things to curtail trend."

Despite the moderation in medical cost and premium increases seen over the past few years, rate increases remain above general inflation levels. "That obviously is an unsustainable pattern," Mr. Zaharuk said.

Premium rate increases for several major managed care companies may be restrained by competition from nonprofit Blue Cross Blue Shield Assn. health plans that have had strong financial results in recent years and are looking to use that capital to provide rate relief, said Sally Rosen, a senior financial analyst with Oldwick, N.J.-based A.M. Best Co. Inc. "So those markets are becoming more competitive and I don't expect that to change much in 2007."

Competition from Blues plans, as well as a competitive environment for national account business, has also restricted the ability of some insurers to achieve growth in the commercial sector, Ms. Rosen said. Companies such as WellPoint, excluding the impact of last year's acquisition of New York-based WellChoice Inc., and Bethesda, Md.-based Coventry Health Care Inc., which lost members in Louisiana due to Hurricane Katrina, have had stagnant growth in their commercial divisions although they have seen solid growth in sectors such as government, individual and small group business.

Potential legislative changes by the newly elected Democrat-controlled Congress could have a key impact on the profits of the managed care sector, analysts say.

If Democratic control results in lower Medicare reimbursement rates, that could cut into profits at companies such as Humana, which has developed a strong presence in the sector.

"If this does happen, it could affect the profitability of some companies," Mr. Zaharuk said, noting that reduced Medicare reimbursements have been an issue in the past for health insurers.

While Best always has concerns about any managed care company that relies on government-funded business due to possible reimbursement rate changes, the near-term effect is likely minimal for health insurers as the 2007 reimbursement rates have already been set, Ms. Rosen said.

Meanwhile, the Democratic leadership's publicly stated desire to pass legislation allowing the federal government to negotiate drug pricing for the Medicare program may have more of an impact on pharmaceutical companies than insurers, analysts say.

Any effort, though, by Congress to address the issue of the uninsured could be a positive development for the managed care sector, analysts say. About 46 million U.S. residents lack health care coverage and a move to migrate some of the uninsured into insurance plans could be "a potentially meaningful source for growth," Mr. Marinucci said.