Humana Presses Its (Medicare) Advantage
Unlike its health-insurance competitor WellPoint, which looks to be ceding its turf in the management of government-sponsored health plans as quickly as it can, Humana remains heavily dependent on managing Medicare and Medicaid plans that account for close to 70 percent of its total membership. And it has a new strategy for extracting maximum profit from this setup while the getting is good, by instituting or bumping up premiums for participants in Medicare Advantage plans -- and cutting their benefits.
First, though, a few other interesting notes from Humana's third-quarter earnings, which it released on Monday. Like other insurers, Humana saw its medical costs shoot up substantially to 83.1 percent of premium income, compared to 81.3 percent a year earlier. Oddly, though, the jump was entirely due to rising costs in its government-sponsored programs, where expenses soared by 2.8 percentage points.
By contrast, Humana actually managed to cut medical expenses for its privately insured customers -- no mean feat these days. The company said the slight drop in its medical-cost ratio -- to 80.2 percent from 81 percent -- reflected a shift in its fully insured membership to individuals and small groups (whose benefits are generally skimpier than those negotiated by larger employers, and which lack the clout to bargain for lower premiums). But Humana also cited "continued underwriting discipline," which essentially means the company is solidly focused on denying coverage to anyone it thinks might get sick enough to run up big medical bills -- in other words, anyone who might really need insurance.
Also unlike other insurers, Humana saw membership increases in both its fully insured and self-funded commercial plans, whereas most big health plans are seeing a big shift from more profitable fully insured plans to self-funded arrangements. Here, it looks like Humana is simply undercutting its competition by keeping premiums flat on its fully insured plans at a time when most other insurers have been busy hiking prices as far and fast as possible.
But it's in Humana's government business that things get really interesting. Humana, it turns out, boosted premiums for its Medicare, military and Medicaid enrollees by 3.7 percent to 11 percent, and cut benefits for its Medicare Advantage members to boot. There's more to come: Humana officials were very clear that the company intends to begin charging premiums across the country for Medicare Advantage -- a program in which companies like Humana get a federal subsidy to take over the administration of Medicare benefits for seniors -- starting next year.
Since Humana has traditionally offered its Advantage programs at no premium in many parts of the country, its move is a frank admission that it can't match the efficiency of Medicare itself, even with the government kicking in a 13-17 percent bonus. In fact, it's something of a kick in the teeth to the whole rationale for Medicare Advantage, which according to its largely Republican congressional supporters was supposed to harness the power of the free market to improve efficiency and lower costs. Instead, Humana claims that it has little choice but to pocket monthly charges from seniors in addition to its federal payments while trimming the expanded benefits that were supposed to be the big selling point for privatized Medicare.
Humana CEO Mike McCallister and COO Jim Murray explained their logic in the company's Monday conference call:
Justin Lake â€" UBS: I've gone back and looked at a few of your larger counties, and it does look like you increased the maximum out-of-pockets, like you said added a premium. It looks like you are lowering benefits to some extent.... Is it some view of cost trends in private fee for service that's increasing that we should be looking for, or is it some view that margins may be needed to be expanded to make this product sustainable?The big context here that the days of Medicare Advantage -- at least, its generous federal payout to insurers -- are almost certainly numbered. Last summer, Congress overrode President Bush's veto in order to phase out Advantage subsidies for so-called "private fee-for-service" plans that offer recipients an unrestricted choice of doctors. As Congress hunts around for cost savings in order to trim the deficit or pay for new programs -- including, possibly, a broad-reaching healthcare-reform plan -- the remaining Advantage subsidies are likely to be in the crosshairs.Jim Murray: [I]f you go back and you evaluate what the Medicare fee for service cost trends are... the fee for service environment experiences trends of 6-7%, and as many of you know, in the last several years, our amount that we got from Medicare more in the range of 4%.... [W]e're just trying to price our products and create benefit structures that take into account the premium that we get and the costs that we are experiencing. So, as we look into 2009, we felt it was appropriate to make those two changes you saw. You also will see a bit of a change in our inpatient benefit structures as well compared to last year.
Mike McCallister: I need to remind you too that this 5% operating margin that we target has an impact on all that. We only have 4 pieces, the premium, the benefits, the SG&A, and the profit, and we start with 5% as a profit and we work around that, and so as we look at the balance, how do you get that? We know what the SG&A is going to be. You're going to adjust premiums or benefits around those two givens, and we have to make the right call as to whether you go with benefit reductions in light of the things Jim talked about or whether you put the premiums in or what the right balance is, and that's judgment as much as anything.
With that in mind, there are several possible ways to interpret what Humana is doing. The stated rationale, of course, is to put its Advantage plans on a premium-based financial footing that would allow them to survive the subsidy's disappearance. The problem here is that Advantage will likely be at a, um, disadvantage compared to traditional Medicare, since Humana's higher administrative costs suggest that it would have to charge more or offer reduced benefits relative to Medicare itself.
Another possibility is that Humana simply hopes to suck as much money out of the Advantage program as it can before it disappears. A third might be that Humana believes some form of universal healthcare will materialize soon enough to render any sort of long-term planning about Advantage obsolete, which certainly seems like wishful thinking to me.
Whatever the true reason, it's clear that Humana, which has grown fat and happy on its Medicare plans, figures to press this particularly Advantage for all it's worth.
Further reading:
