A Tale of Two Insurance Companies Depicts Negative Trends

Humana and WellPoint both released third-quarter results in the past few days, and the comparison between their financial pictures is illuminating. Humana relies on government business-and especially Medicare Advantage-to a much greater extent than WellPoint does. So while WellPoint saw its revenues and profits dip in the third quarter, because of a continuing decline in commercial membership spurred by the recession, Humana had a big increase in earnings as it continued to enjoy the relatively high margins and rising membership of its Medicare plans. But, with big cuts looming in Medicare Advantage, Humana is forecasting lower profits next year.

Humana's third-quarter net income leaped to $301 million from $183 million in the year-earlier period on an 8 percent revenue increase to $7.72 billion. Pretax income in its Medicare segment jumped 75 percent to $474.5 million, and enrollment in its Medicare plans was 1.51 million, up 11 percent from a year ago. In contrast, the company's commercial insurance segment generated a pretax loss of $5.2 million. Humana expects continued losses in that sector in 2010; and while the company anticipates its Medicare enrollment will rise, it foresees lower profits on that side as well.

In the third quarter, WellPoint's net earnings dropped 11 percent to $730.2 million from $820.7 million for the prior-year period. Revenue rose slightly to $15.4 billion. Enrollment in WellPoint's commercial business, which includes employer-sponsored plans, dropped 3.5 percent, and its overall medical membership fell 4.2 percent from a year earlier.

One drag on WellPoint's third-quarter net was the federal government's subsidy of COBRA plans that laid-off workers have been eligible for since the start of this year. Because COBRA premiums are too expensive for the majority of those who have lost their jobs, the people who have taken advantage of the government subsidy are those who have greater healthcare needs. This adverse selection is costing Wellpoint $1.50 to $2 in claims for every dollar it collects in COBRA premiums. The situation is expected to grow exponentially worse in the fourth quarter, as enrollees hustle to get needed services before their COBRA subsidies run out.

The company's medical expense ratio was 81.1 percent in the third quarter, down from 82.5 percent for the same period last year. WellPoint expects its underlying medical costs to rise about 9 percent for all of 2009. The majority of this increase comes from "unit cost increases," which reflect higher reimbursement of providers and rising costs of drugs and supplies. But utilization of services is also rising, partly due to the increased COBRA membership and the swine flu pandemic, WellPoint said.

So what can we learn from this tale of two insurers? Essentially, that while government business is doing better than commercial business, the signs point downward for both sectors. Nevertheless, the stock prices of both Humana and WellPoint are as high or higher than they were at the beginning of this year and two to three times their level during the panic of last October. So maybe the smart money is betting that private insurance will survive and thrive under healthcare reform.