Watch CBSN Live

Healthcare Reform Looms, but Big Health Insurers Are Raking in the Bucks

Three of the four leading health insurers reported substantial profit gains for the third quarter of 2010, contradicting earlier health plan statements that health reform was causing them to raise premiums. Their gains also raise questions about their claims that recent premium hikes simply reflect higher underlying health costs.

In fact, Humana (HUM) and Aetna (AET) both attributed their strong performance partly to a lower demand for medical services, which might have been driven by the way employers are continuing to shift premium and out-of-pocket healthcare costs onto employees. But the largest factor in the profit growth of Humana and UnitedHealth Group (UNH), the other third-quarter winner, was the increase in their government business, particularly Medicare Advantage enrollment. WellPoint (WLP), the only member of the quartet that posted lower results, reported a drop in Medicare managed care members.

WellPoint's operating profit dropped 19 percent to $1.04 billion on revenue of $14.3 billion, down nearly 6 percent from the year-earlier figure. But its operating margin was 7.3 percent, none too shabby compared to margins of other healthcare players. Operating gain from its commercial business jumped 21 percent to $761 million, while its margin for that sector soared to 8.9 percent from 6.7 percent in the year-earlier period. In contrast, WellPoint's operating profit for its consumer business, including individual and Medicare Advantage plans, plummeted nearly 50 percent to $261.7 million. The company blamed a reduction in Medicare Advantage payments.

However, that didn't create any problems for Humana, which saw pretax income for its government segment rise 17 percent to $554 million, primarily because of a 17 percent increase in enrollment in its Medicare Advantage plans. Percentage-wise, Humana did even better on the commercial side, reporting a $68 million profit, compared to a pretax loss of $5.2 million in the prior-year period. Humana attributed the positive results to a decline in demand for medical services as well as pricing discipline and administrative cost controls.

Overall, Humana posted a 31 percent gain in operating income to $648.4 million. Revenue of $8.42 billion was 9 percent higher than in the year-earlier period.

United, which saw big gains in Medicare and Medicaid business, posted third-quarter revenue of $23.7 billion, also 9 percent above the prior-year figure. United's operating income leaped 28 percent to $2.15 billion, and its operating margin advanced to 5.4 percent from 4.8 percent.

The performance of Aetna most clearly reflected the impact of lower healthcare spending. While its membership dropped 74,000 to 18.4 million members as of Sept. 30, and its revenue dipped 3 percent to $8.46 billion, its third-quarter operating profit soared 36 percent to $419.6 million. The key was its commercial "medical benefit ratio" (the ratio of premium revenue to medical expenses), which dropped to 80.5 from 85.6 percent for the prior-year period. What this means is that Aetna spent 80 cents of every premium dollar on patient care, compared to 85 cents in the third quarter of 2009.

Aetna contends that it worked this magic for investors through superior execution. Stated Aetna President Mark Bertolini, "We offer the right benefit designs, effective provider networks, health and wellness programs, and unique information tools to help our members think and act like consumers when purchasing health care."

In truth, Aetna is ahead of the curve in areas like health coaching and web-based health management tools for its members. But frankly, I think Bertolini's claim is bogus: Aetna's managed care strategy alone did not cut its medical benefit ratio by 5 percentage points in a single year. What did it was the extra cost that insured people must bear every time they see the doctor, go to the ER or buy a prescription drug.

Next year, the medical benefit ratio for large-company plans must be at least 85 percent, according to the healthcare reform law. So Aetna and other insurers will have to do some fancy tap-dancing to keep up their profits. But for now, they're sitting pretty.

Image supplied courtesy of Flickr.