Friend and colleague Bob Laszewski has shined a very bright light on Wall Street’s ignorance about the health insurance business.
Bob notes: “We are way past the time the really smart people on Wall Street (that would be all of you) needed to start asking just what the future of this business is. If the answer you get is that the future of managed care is just to ride an unsustainable health care cost trend rate many more years into the future[bold is mine] you might just want to dig a little deeper this time.”
As usual, Bob is dead on. Health plans make their money by pricing just above trend, selecting risks, and avoiding claims wherever and whenever possible. They are getting (justifiably) hammered by regulators and the press for claims avoidance, and Wall Street may have finally woken up to the inherent problems in the standard health plan business model.
There are far too few health plans that actually do anything remotely resembling ‘managing care” – they manage risk, they manage reimbursement, they manage analysts – but they do not manage care.
I’ve said before, and repeat here – health plans that know how to manage care, particularly for the previously-uninsured, are going to do really well when universal coverage becomes the law of the land.
Unfortunately, there are few plans that qualify.

Anthem/Wellpoint’s ill-fated efforts to reduce medical costs by retroactively cancelling policies for members with mistakes on applications has become the company’s open sore. The latest is the filing of a major lawsuit by the City of Los Angeles, accusing the big health plan of “unlawfully canceling the coverage of thousands of Californians after they filed medical claims.”
While earlier reports indicated around 700 policies had been affected, the LA City Attorney ‘s suit alleges that ‘up to’ 6000 members had their coverage cancelled.
And that is in LA County. If other municipal prosecutors decide to join in Wellpoint may find itself facing a plethora of suits from all over California; if it expands east…
Once again folks, reform is coming. Do you want to be helping to navigate the bus or do you want to be the bug on the windshield?

When a high-flying stock hits the tank, owners get nervous. In some cases (Enron and Bear Stearns come to mind) that is an appropriate reaction. In others, the only reaction is to look with incredulity at the behavior of the ‘markets’ and the wise ones who steer their course.
Health plan stocks have taken a beating of late, a beating that in my mind is (for most companies) wholly unjustified. One of those with black and blues is Coventry. Here’s one perspective on that situation from the desk of Dale Wolf, Chairman and CEO of Coventry – (slimmed down for your reading efficiency) to Coventry employees, with my commentary interspersed.
“…Year-to-date stock prices in the U.S. are down by 8.1% as measured in the S&P 500 and 5.4% in the Dow Jones Industrial Average. On world markets, declines are even greater, as demonstrated by the 17.8% decline in the Dow Jones Euro Stock Index. Closer to home, our own stock is off 28.1% since the beginning of the year, as compared to a 35.3% decline for our peer group in managed care.
What’s driving all this?
Obviously, on the national and world scene, it’s a compilation of the factors outlined above, including the mind-boggling repercussions of previous irrational exuberance in housing prices and lending practices…
The managed care industry has been hit harder than overall equity markets. While one never knows for sure, it is clear that an upcoming election, and its prospects for how health care is financed in the future, clearly weighs on the minds of investors. (I agree with Mr. Wolf; although the future of health care reform is indeed cloudy, what is crystal clear is health plans will play the central role in any reform initiative that gets through Congress and is signed into law. Why investors don’t or won’t or can’t see this is puzzling). Notwithstanding all the other turmoil, this single fact was likely to have had a dampening effect on sector stock prices in 2008. (On top of that, the announcement two weeks ago by one of our competitors of an earnings shortfall sent investors into a tizzy about price discipline, reserve adequacy, the “underwriting cycle”, etc. While most of the companies in the industry have indicated they are not experiencing similar issues, it has been confusing to investors, and hence a major sell off.
(Coventry has been dinged for a failure to adequately forecast and price for this year’s particularly rough flu season. Flu, unlike overall medical trend, is a wild card, and by definition can’t be ‘predicted’ or priced for with a high degree of accuracy. Investors and analysts might as well blame crop insurers for damage caused by falling meteors)
So what happens next?
In the short run, I could speculate. (and does…) Certainly stable first and second quarter earnings will be positively viewed by investors. Encouraging prospects for 2009 will also be favorably viewed by investors. But, fears of the shifting political winds will continue to be a headwind. These various data points make it pointless for me to speculate when our company’s stock, and indeed that of the managed care industry, will return to normalcy…whatever that is.
But what I can be highly confident of is that, in the longer run, equity values will follow the fundamentals. Investors look for growth in earnings – over simplified, that is more or less all that matters. Our job, as stewards of their money, is to produce earnings growth. If we, as an industry but, more importantly, we as a company, continue to produce earnings growth north of 10% a year, we will be recognized by investors through appreciation in our share price. While I don’t know when and to what degree, I feel very confident that our current stock price is disjointed from the performance of our company, and if we continue to perform as we have, these will realign.
More importantly, other than buying back our stock with our free cash, which we have been doing as a company, there’s absolutely nothing we can do about our share price except to take care of our customers, find new sources of revenue, and thereby continue to grow the earnings of this company. While I understand completely that many of you have felt the sting of our declining equity prices in terms of your own financial security, I can assure you that there are many others in this country for whom the economy over the next number of months will produce a far worse result… ”
Disclosure – I don’t own Coventry stock. But with a PE of 10, I may well buy it.
One observation re Coventry – this is a company that, justifiably, prides itself on its ability to predict and price for medical trend. It is not expert in nor does it even emphasize medical management, chronic care management, outcomes assessment, provider profiling, or any other form of ‘managed care’. Coventry is expert at managing the balance between pricing and reimbursement.
If and when true reform with universal coverage becomes the law of the land, health plans will no longer be able to win by underwriting; they must be able to deliver a lower medical cost for their population along with higher levels of member satisfaction. This will be a problem for Coventry – a potentially big problem.

Wellpoint has been slammed (justifiably) for its rescission practices (retroactively canceling insureds’ policies when they have the temerity to actually get care) and sued for allegedly inflating earnings expectations (although some of the slamming is, in my view, unjustified).
United Healthcare has also crossed the stupid line a time or four, inflating the CEO’s compensation package by back-dating stock options and fumbling the acquisition and integration of Pacificare, publicly fighting with providers (although occasionally I have to come down on UHC’s side) and mishandling customer complaints.
HealthNet has not escaped unscathed either. The company went way way past the stupid line when it actually paid bonuses based on executives’ success in canceling individual policies (but only for individuals with high claims).
Aetna has been able to avoid embarrassing itself, while making some significant strides in areas that matter. Whether its chronic disease management, sharing data re provider quality and price, or publishing data on outcomes, the huge insurer is moving in the right direction.
Aetna has also been able to build a substantial presence in the work comp network business, essentially forcing its largest competitor to replace its networks with Aetna’s (while sticking with WC despite doubts among industry experts (that would include me) that Aetna had the patience required to survive and prosper).
Their latest move also makes sense – Aetna is investigating a P4P model for pharma, potentially basing payment on efficacy for the wildly expensive specialty drugs.
Perhaps this is partially due to lessons learned after the company’s well-publicized stumbles after merging with USHealthcare a decade ago. For a while, the staid, customer-oriented culture at the old mother Aetna looked to be overwhelmed by the aggressive, no-holds-barred, occasionally-downright-nasty USHC approach. Management righted the ship just in time, and Aetna has enjoyed better relations with providers, solid financial returns, and growing membership for several years now.
As one reader pointed out some months ago, mother Aetna is certainly capable of doing much more – pushing disease management further and faster, becoming more aggressive on P4P, and building out its member services applications.
But compared to its competitors, Aetna is doing well. Sure, the stock is down by 25% so far this year, but that’s a result UHC, Wellpoint, HealthNet, Humana, and Coventry owners would take in a heartbeat.

As I’ve noted repeatedly, there is a place for consumerism in health care, but it is by no means a panacea. And many CDH Plans are poorly designed and will likely lead to higher costs down the road – studies have indicated that when asked to pay more for maintenance meds, some people stop taking them. And that inevitably leads to a decline in health status and rise in the number of acute episodes.
The problem is exacerbated for people with little to no money in their HSA accounts; any maintenance medications, diagnostic tests, or preventive care will have to come out of their pocket – a pocket that is often empty.
Thus, while CDHPs (that don’t account for this limitation) may well save money in the short term by reducing premiums, they will increase employers’ costs over the medium to longer term.
Which leads to the next issue – most folks under 65 get their insurance from their employer. Unless health care reform somehow removes employers from the process, that is not going to change. For now, employers decide what coverage most Americans get – and therefore the ‘health plan’ has to make sense for the employer.
For employers, HRAs (where the employer ‘controls’ the funds) are a much better idea than HSAs (where the employee controls the funds; employees who leave a job take their HSA accounts with them). So employers are reluctant to fund an HSA account knowing that those dollars walk out the door when the worker does. In 2007, the (exhibit 8.5, p. 125) average employer funding for single coverage HRA accounts was $915 v. $428 for HSAs; for families it was $1800 for HRA v. $714 for HSA accounts.
One firm that looks to have figured out that HRAs are a better answer for small to mid-market employers is Barrett Benefits Group. (I have no business relationship affiliation with the firm). Their product, branded as ‘SharedFunding’, is perhaps best characterized as a hybrid. SharedFunding is an HRA-based high deductible plan with employee accounts that are funded as needed. Unlike other HRA-type programs, this plan requires the employer to fund the individual accounts on an ‘as-needed’ basis. This pay-as-you-go model significantly reduces both insurance premiums and funding requirements, while ensuring the employee accounts are funded appropriately.
Based in Ohio, BBG has recently expanded operations in Florida, and is developing other tools to help employers control the costs of chronic conditions.