Managed Care Growth Facade

July 31, 2009

Can managed care plans consistently increase membership without sacrificing profits — or conversely increase profits without sacrificing membership?  The recent example of Aetna (solid membership growth followed by profit shortfalls) and others before suggests the answer is no, as noted by Oppenheimer analyst Carl McDonald.

While it was intellectually stimulating to consider why Aetna might be different from its managed care peers, and better able to manage through the more difficult fundamental environment, it turns out at the end of the day that Aetna was no more immune to the situation than either UnitedHealth or WellPoint. With Aetna’s operating earnings guidance now down almost 30% for the year, it seems safe to say that none of the larger plans in the group can really stake a claim to having any kind of sustainable competitive advantage over their peers. Aetna had the responsibility for awhile, but as it turns out, the ability to grow commercial risk enrollment profitability was just a façade that couldn’t be maintained for very long. 

One of the things this reality suggests — despite claims of differentiation among leading plans — is the notion of health insurance as commodity.  Healthcare reform featuring insurance exchanges offering plans with standard benefit packages would only make it more so.


Aetna Doubles Down on EAP

July 31, 2009

Aetna may (or may not) be looking to sell its PBM operation (see prior post).  But that doesn’t mean it’s giving up on integration. 

Aetna announced today that it was acquiring the employee assistance program business of Psychiatric Solutions for $70 million in cash.  The operation, called Horizon Behavioral Services (Lewisville, TX), has about 5 million EAP members and generated revenues of about $22.6 million through six months of 2009.

Aetna already has about 7 million EAP members (14 million total behavioral lives), so the acquisition will nearly double its EAP business.  The deal also expands Aetna’s EAP presence in the mid-sized group market (300 to 3000 employees), a strong segment for Horizon.  Most of Aetna’s current EAP business is national accounts (3000+ employees).

Can Cigna Cut Its Way to Prosperity?

July 30, 2009

Cigna has been cutting costs to boost profits, and while the company has made progress, it still has a ways to go.  Per member costs at Cigna are still about 10% higher than key managed care competitors.  It plans more job cuts, vendor consolidation, administrative efficiencies through technology, outsourcing and real estate sales.  In the second quarter alone, the company cut 465 jobs.  Second-quarter operating expenses at Cigna’s healthcare segment fell 3% or $25 million from a year earlier. 

Cigna has been struggling to get its costs in line given hefty membership losses.  Total medical membership fell 7% in the second quarter, compared to a year earlier, with at-risk down 13%, experience-rated 17% and ASO 6%. 

In some ways, Cigna is an extreme example of a problem potentially facing other managed care plans: how to boost margins without losing so much membership that overall cost structures get out of line.  What was it the Pointy-Haired Boss said in Dilbert?  Imagine how much money we’d save if we fired everybody.

Public Plan Takes Another Hit

July 30, 2009

No public plan or a very watered down version.  That’s been my prediction on healthcare reform for some time.  And that’s how it’s shaking out.  The House reportedly reached a compromise to include a public plan that pays providers negotiated rates — rather than rates set at Medicare levels — taking away a key competitive advantage for the public option.  The Senate Finance bill, meanwhile, doesn’t include a public plan at all.  It’s crunch time for healthcare reform.

WellPoint Hammered by Cloudy Outlook

July 29, 2009

I suppose you can blame pretty much anything on the economy.  But WellPoint Inc. really does seem to be susceptible to downturns — in part because of its exposure to the small group and individual markets.

Shares in the company had fallen 7% by early afternoon today, with investors spooked by a cloudy outlook in the face of high unemployment. Here are some bullet points, as reported by the company in its second-quarter earnings call this morning.

  • WellPoint lowered its 2009 profit forecast, blaming the impact of the economy on the company’s commercial business.  Overall, profits fell nearly 8% in the second quarter, which still topped Wall Street expectations. 
  • Medical membership fell by 1.1 million or 3% to 34.2 million as of June 30, compared to a year earlier.  Small group membership alone fell by 734,000.  Compared to the first quarter, total medical membership was down 338,000, almost entirely from commercial; about 75% of the loss came from job attrition among existing clients. 
  • Commercial medical cost ratio rose nearly 200 basis points in the second quarter, compared to a year earlier.  The company said that markets hit hard by the recession, such as California and Ohio, fared worst.  It also said layoffs have been mostly among lower utilizers of healthcare services.  Exactly why isn’t clear. 
  • COBRA membership — with its high medical cost ratio — has increased to 2.2% of WellPoint’s fully funded membership, compared to 1.6% as of year-end 2008.

So basically what started as a good day (Hey, they beat 2Q09 consensus!), turned into a downer really fast.

Coventry Gets Focused — With Good and Bad Results

July 28, 2009

The return of Allen Wise to the chief executive slot at Coventry Health Care earlier this year (see prior post) already appears to be paying off. 

Mostly, the company seems to be making progress toward getting pricing in line with costs, stabilizing margins, exiting certain businesses (like Medicare PFFS and Medicaid ASO), and zeroing in on others (like Medicaid risk, individual and Medicare CCP).  Commercial medical cost ratio in the second quarter fell 100 basis points to 81.7% — and that’s important given that the company got whacked in 2008 by soaring MCRs.

The bad news is that the focus on margin improvement is expected to drive commercial risk membership down about 9% in 2009, said Wise on a conference call with Wall Street analysts to announce second-quarter 2009 financials.  (Group risk is expected to fall 12%, with about half the decline coming from price increases on renewals and half from other types of attrition, such as layoffs, small business failures, etc.). 

Wise said that in the past, customers were usually willing to absorb 500 basis points of price increase, assuming they were happy with a particular plan’s benefits and service.  “They’ll change for 100 basis points in today’s economy,” he said, adding,  “We paid a bigger price than would be ideal in membership.”

All of which makes you wonder what kind of member attrition Aetna will have now that it also appears to be firmly committed to margin improvement (see prior post).  When it comes to balancing growth and profit margins, MCOs are really boxed in.

Aetna Bites Bullet On ’09 Outlook, PBM

July 27, 2009

Two news items concerning Aetna today.  Neither surprising. 

First, The Wall Street Journal reports that Aetna is considering the sale of its pharmacy benefit management unit.  After WellPoint sold its PBM for a hefty $4.7 billion, several industry observers (myself included) figured others would follow.

How much is the Aetna PBM unit worth?  Lisa Gill of J.P. Morgan says Aetna could get anywhere from $1.6 billion to $1.8 billion for its PBM unit.  Glen Santangelo of Credit Suisse puts the value at $2.4 billion.  Both seem high to me, but the ultimate price-tag will depend on which assets Aetna sells and the terms of the PBM contract between Aetna and the acquiring entity.

Whatever you think of integration in managed care — i.e., the notion that a health plan can better manage overall medical costs by owning PBM, vision, dental and behavioral plans — Aetna’s PBM appears to lack a compelling offering in the eyes of the marketplace. 

Plus, it’s pretty hard to make a case that owning a PBM helps with overall medical cost management when you keep reporting medical costs are rising faster than you predicted — which brings us to news item number two: 

Aetna has — yet again — cut its 2009 earnings projections, this time to a range of $2.75 to $2.90 per share.  The company — yet again — blamed higher than expected medical costs in its commercial health plans.  I’ve written before (see prior post) about the potential bind Aetna was in concerning pricing, membership growth and profits.  The only question now is whether the company finally has its pricing and costs in line.  (Addition, July 28, 2009: Wall Street analysts believe the answer is yes, according to several research notes that passed our desk yesterday afternoon and this morning).

Shares in Aetna were down nearly 5% in midday trading on the revised 2009 forecast.

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