Shares in Cigna are down 20% in midday trading today (and have fallen 72% from their 52-week high) after the company announced a 53% decline in third-quarter net income and a reduction in full-year 2008 earnings outlook. The decline was entirely related to losses in the company’s run-off reinsurance business. Membership, meanwhile, is expected to fall 1% in 2008 and another 2% in 2009. What’s it all add up to? Cigna is now the third worse performing managed care stock among 13 issues tracked by CRG, beating out only Health Net (down 77% from its 52-week high) and Coventry (down 80%). To which we can only say, “Ouch!”
What else can we say about Aetna’s disappointing third-quarter 2008 earnings release that we didn’t already say about the managed care industry at large in our post on Monday titled Searching for Hope in 3Q08 Managed Care Financials. Aetna’s earnings fell because of asset writedowns associated with investment losses, medical cost ratio rose, and the company disappointed analysts with lower-than-expected 2009 earnings projections. The company said its “core business performance remains solid,” and we’re hoping that’s not analogous to John McCain’s statement that “the fundamentals of our economy are strong.” Aetna’s shares fell 8% today and are down 57% from their 52-week high. The truth is that Aetna is probably all right, but like the rest of the industry, a lot will hinge on whether premium yields keep pace with cost trends next year. Of course, that’s not exactly news to anyone.
An editorial in today’s New York Times does a good job of explaining the pros and cons of the competing universal healthcare proposals from Obama and McCain. The Times concludes: “Mr. Obama’s plan is the better one because it would cover far more of the uninsured, spread risks and costs more equitably and result in more comprehensive coverage for most Americans. We fear Mr. McCain’s plan would jeopardize employer-based coverage without providing an adequate substitute. At a time when so many employers are reducing or dropping coverage, that is not a risk that the country can afford to take.”
The Kiplinger Letter reports in its Oct. 24 issue, “Mounting medical debt, likely to boost bankruptcies. The number of people who are paying for health care with credit cards is on the rise. Moreover, recession is sure to mean more people without health care insurance….Even the insured will feel the strain, postponing services that aren’t urgent and skipping medications to hold down out-of-pocket expenses.”
Some of the nation’s top managed care plans have released their third-quarter 2008 financials, and we’re looking for signs of hope amid the carnage of recent memory.
WellPoint said third-quarter net income declined; however, the company is projecting a “single-digit” increase in earnings in 2009. Coventry got whacked, reporting a 49% decline in third-quarter profits; the company said it won’t fully bounce back until 2010. UnitedHealth’s third-quarter 2008 earnings fell 28%; however, the company expects improvement in 2009.
Industry-wide improvement in 2009 hinges largely on a simple outcome, i.e., that premium rate increases keep pace with costs. We’re not allowed to use the words “insurance cycle” or imply that a down “insurance cycle” has negatively affected profitability among health plans. Except for the fact that costs in some cases have run ahead of premiums, squeezing profit margins, and hammering stock prices—all the things that point to a down cycle—we’re not supposed to admit that an “insurance cycle” even exists.
By extension, therefore, we’re not supposed to suggest that the “insurance cycle” will turn favorable again in 2009 and beyond. Therefore we won’t say the “insurance cycle” is going to turn favorable in 2009, which is a good thing because we’re not actually sure the “insurance cycle” will turn favorable in 2009 even if an “insurance cycle” existed, which it doesn’t.
Our uncertainty stems from premium projections for 2009 that look pretty similar to 2008, continued commercial competition, and the feeling that very real drop-offs in utilization because of the down economy probably won’t be a big enough offset next year. We’re looking more toward 2010 for a turnaround, barring any big policy changes coming out of a new Administration in Washington and assuming there is such a thing as an “insurance cycle,” which of course, there isn’t.
Here’s an example of the type of consumerism we don’t want in healthcare. From an article in last week’s New York Times titled “In Sour Economy, Some Scale Back on Medications.”
“‘People are having to choose between gas, meals and medication,’ said Dr. James King, the chairman of the American Academy of Family Physicians, a national professional group. He also runs his own family practice in rural Selmer, Tenn. ‘I’ve seen patients today who said they stopped taking their Lipitor, their cholesterol-lowering medicine, because they can’t afford it….I have patients who have stopped taking their osteoporosis medication.'”
Barack Obama reiterated his views on Medicare HMOs in last night’s debate: “We spend $15 billion a year in subsidies to insurance companies under the Medicare plan. It doesn’t help seniors get any better. It’s not improving our healthcare system. It’s just a give away.” The Obama platform on Medicare HMOs (here) states that these “excessive subsidies…create an incentive structure that has led to fraudulent abuses of seniors” and calls for their elimination.
Couple this statement with Obama’s universal healthcare proposal to offer a public plan similar to what’s offered to federal employees, and you’ve got the makings of a big political battle with the health insurance industry.
But assuming Obama wins (and I think he will) and assuming the Democrats expand their majority in Congress (and I think they will), this is a battle the health insurance industry just might lose. And that’s going to affect the profitability of Medicare Advantage plans. How much? Not as much as you might thing, say some observers. We will, however, be keeping our eyes on whether we see the type of large-scale pullbacks by Medicare HMOs that we saw about a decade ago.