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Low ulitization rates boot health insurer profits


Utilization rates well below historical levels—likely dampened by a struggling economy—continued to translate into robust revenue and profit for many of the nation's largest publicly traded health insurers through the first three quarters of 2011.

While enrollment has remained largely flat for the seven largest publicly traded managed care organizations, their revenue increased 4.5% this year compared with the nine-month totals last year.

Net income for the group also increased, rising 7.8% over 2010's nine-month totals.

But without considerable growth in enrollment, that rate of growth could slow considerably if utilization rates suddenly swing upward, as many analysts and industry executives believe they eventually will.

While the largest publicly traded health insurers' nine-month results met or exceeded expectations in most cases, investors again have been warned that the gains still rely too much on depressed claim activity to be thought of as a sustainable condition.

“Companies have consistently stated that they expect utilization to accelerate anytime, but so far there hasn't been much of an indication of that,” said Matthew Coffina, an equity analyst at Chicago-based Morningstar Inc.

At the same time that many market leading firms increased their full-year guidance estimates for revenue and net income, executives said utilization already has begun to pick up in certain lines of care, and they expect claim activity to rebound across the board as early as the fourth quarter this year.

“I think what we're seeing in utilization is really an extension of themes from last quarter,” said Dan Schumacher, chief financial officer of Minnetonka, Minn.-based UnitedHealth Group Inc., noting that the company's utilization rates so far this year had increased over the prior year, but the comparison was skewed by historically low claim activity last year.

“We're also seeing increased consumption levels, and that consumption is going up in the outpatient and physician categories most notably,” Mr. Schumacher said. “On the inpatient care side, we continue to see a more restrained utilization, so that's still trending flat to slightly down.”

One inherent danger of a prolonged period of low consumption levels looming over the industry is not just that claim activity will increase, but that it will do so suddenly, analysts said.

“At a certain point, you wonder if there's a pent-up demand for treatment and care, where people have been deferring procedures that they really need,” said David Windley, a Nashville, Tenn.-based managing director at Jefferies & Co. Inc.

“Are they going to give in and reach into their pocket for that procedure, and will it be a gradual return or a spike?” he asked.

Looking at the nine-month results for managed care industry leaders, Mr. Windley said the degree to which health insurers have exceeded expectations might have waned a bit, but their positive performance in the first half of the year effectively “raised the bar” for the nine-month totals.

“With each progressive quarter, you're not going to see the magnitude of upside that we saw in the first half of the year,” Mr. Windley said. “That being said, we still had companies reporting (revenue and net income) above expectations.”

Continuing a yearlong trend of revenue growth, UnitedHealth Group reported $75.95 billion in revenue through the first nine months of the year, an 8.3% increase over the same period a year ago (see chart).

The company's nine-month net income rose 8.2% to $3.88 billion over the same period last year. Total enrollment also rose as UnitedHealth has added some 2 million members since the end of last year's third quarter, including 1.1 million in its commercial business.

Louisville, Ky.-based Humana Inc. continued its strong showing in 2011, posting year-over-year increases in revenue, earnings and enrollment. The firm reported total revenue for its first three quarters of 2011 at $27.78 billion and earnings at $1.22 billion, increases of 9.7% and 23%, respectively, over the matching period in 2010.

Humana's enrollment jumped 7.9%, adding around 800,000 members since last year.

For the foreseeable future, analysts said the industry will be focused on the general state of the economy and, in particular, how the country performs on jobs growth. Given continuing volatility in global markets and underwhelming expansion in U.S. employment to date, analysts said it is unlikely insurers will see the kind of enrollment surge necessary to fend off a rollback of the profit and revenue increases they've enjoyed in the past year.

More immediately, the ongoing negotiations in Washington over a deficit reduction package also could negatively affect insurers. Cuts to Medicare and Medicaid funding already are built into the default spending reductions that would take effect should lawmakers appointed to the 12-member “supercommittee” fail to reach an agreement by the end of November.

However, considering recent signals from some committee members that deeper cuts to the programs—particularly provider reimbursements—could be used to leverage tax increases, analysts said the default spending reduction package could ultimately be in the industry's best interest.

“If they don't wind up getting anything constructive done, the stocks would all do pretty well, because it's a known risk and the market has had an opportunity to digest it,” Mr. Windley said. “The impact there wouldn't be all that onerous on the Medicare Advantage plans, and the commercial plans likely wouldn't feel any direct impact from that.”