First-half profits surge for managed care firms

Major managed care companies experienced strong profits in the first half of 2007 thanks to a robust second quarter, with commercial health care cost and premium increases hovering in the 6% to 8% range.

Indianapolis-based WellPoint Inc., the largest managed care company in membership, said it expects its medical cost trend to remain relatively flat in 2007 at just less than 8%, while Hartford, Conn.-based Aetna Inc. said its medical cost trend is projected to remain stable at 7.5%, plus or minus 0.5%.

"Premiums and rate increases at the present seem to be fairly stable," said Sally Rosen, managing senior financial analyst with Oldwick, N.J.-based A.M. Best Co. Inc. "They're expected to remain fairly stable at this point."

U.S. health insurers, which reported sluggish first-quarter profits, rebounded with strong earnings during the second quarter.

Minnetonka, Minn.-based UnitedHealth Group Inc., the largest managed care company in revenues, reported first-half net income that was 13.4% higher than the year-earlier period (see chart). In the first quarter of 2007, its profit growth was much smaller at 4%.

Louisville, Ky.-based Humana Inc. posted strong earnings during the first half, reporting a net profit increase of 66.3%, with the second quarter overcoming a nearly 15% drop in first-quarter profits, amid continued growth in its Medicare business and lower medical expenses in both its government and commercial segments.

"Humana had a better Q2, but they're so heavily into Medicare, we'd expect that," said Stephen Zaharuk, vp and senior analyst for Moody's Investors Service Inc. in New York., referring to the cyclical nature of the government business.

Among commercial fully insured groups, Humana's medical cost trends were in the range of 4.5% to 5% with premium yields in line with cost trends. Humana has consistently reported lower cost trends than major competitors, which Humana officials attribute to lower utilization and growth in its consumerism products.

"I feel pretty good about our ability to continue to see improving trends," Jim Murray, chief operating officer, said during the company's second-quarter earnings call.

Kaiser Permanente, meanwhile, experienced what company officials described as a "positive anomaly" during the first half, reporting profits that were more than twice as large as the same period last year—$1.82 billion through the first half of 2007 vs. $720 million for the 2006 first half. Officials of the Oakland, Calif.-based insurer credited the gain to a sizeable reduction in reserves for professional liability and workers compensation costs and strong earnings from contract renewals.

Philadelphia-based CIGNA Corp. was the only major U.S. health insurer reporting that first-half profits had declined, a 22.1% drop vs. the year-earlier period, related to the runoff of its reinsurance business.

The company's health care segment, though, remains profitable, said Moody's Mr. Zaharuk. "We think it's just a one-time hit," he said.

Competition heats up

Despite the profit rebound, major managed care companies have had sluggish commercial membership growth so far this year.

UnitedHealth, for example, lost 20,000 commercial members compared with the same period last year.

The commercial market is experiencing strong competition that will continue for the next few years, Stephen Hemsley, UnitedHealth's president and chief executive officer, said during the company's second-quarter earnings call. The company is improving its commercial competitive position by remaining engaged in programs to contain medical costs and driving greater product innovation to stimulate profitable growth and attract quality membership with favorable retention prospects, he said.

As part of that effort, UnitedHealth is launching products aimed at helping smaller employers provide affordable health care coverage to their employees. For example, its Vital Measures program intends to reduce out-of-pocket health care expenses for individuals and families with healthy lifestyles. The program was introduced last month to employers with 100 to 1,000 fully insured employees in Colorado, Ohio, Pennsylvania and Rhode Island. A national launch is slated for 2008.

"I think there has been a lot of fresh thinking about the spectrum of products that are being brought to bear," Mr. Hemsley said.

WellPoint, meanwhile, experienced unusually high declines in its national account segment in the second quarter due to employee reductions in several industries, including automobile, home building and the mortgage sector. The company, though, has seen strong year-over-year growth in the segment, gaining 477,000 members in the past 12 months.

On the other hand, Aetna has seen some growth in its commercial sector, gaining about 45,000 members in the second quarter and about 240,000 members in the past year.

"I don't think we're going to see a lot of commercial membership growth," Moody's Mr. Zaharuk said. Unlike previous years, none of the large health insurers is having major problems resulting in sizeable membership losses, he said.

For example in recent years, CIGNA raised premiums in response to higher-than-expected medical costs and enabled competitors to siphon major accounts. "Nobody's gaining because a company's in trouble," Mr. Zaharuk said of the current environment.

With sluggish commercial membership growth, managed care companies are showing more interest in the Medicare/Medicaid business, analysts say.

UnitedHealth and Humana are the major players in the government sector, although Aetna is trying to gain a foothold in the market through its recently completed $535 million acquisition of Schaller Anderson Inc., a provider of health care management services for Medicaid plans in Phoenix.