Although health plan profits were up substantially in the first 9 months of 2004, only five companies were responsible for over half of those profits. Weiss Ratings’ (along with Fitch, my favorite rating firm) analysis excluded Kaiser, which had gains of $1.2 billion primarily from a regulatory change.
Four of the top five were HMOs owned by Blues plans, with the leader Blue Cross of California posting over $400 million in profits for the period.
Even more notable was the overall improvement in the industry’s financial condition, Weiss upgraded 65 HMOs and only downgraded 3. This improvement was driven by a 33.6 percent increase in profitability.
Other reports indicate the decline in the rate of medical inflation coupled with increased premiums have been largely responsible for the improvements. United HealthGroup, Coventry, Aetna, and others have all reported this “decrease in the rate of increase”.
Good times never last; consolidation in the industry has led to its’ present oligopolistic condition. Thus, health plans have three choices if they are to grow – take market share by cutting price; acquire other health plans; or seek other sources of revenue. Actually, there is a fourth – seek to reduce “cost of goods sold” by reducing reimbursement to providers, but this is highly unlikely to succeed.
The pace of acquisition will likely slow for the simple reason that there are fewer health plans to acquire. Potential candidates include Coventry, but their high-flying stock price likely precludes any move in the near future.
Plans are actively and aggressively, seeking new sources of revenue. The move into workers comp network rental by Aetna and Wellpoint are but two examples. However, it is highly unlikely that there is enough revenue in the ancillary lines to please the Street’s demands for ever-increasing growth.
That leaves price cutting. Yes, all will claim they will never repeat the mistakes of the past, and most will do so anyway. Good times never last, especially in the insurance industry.
What does this mean for you?
Three things.
1. If you are a provider, watch the new contract offers carefully.
2. If you are a workers comp payer, lock these new entrants into long term contracts with significant exit penalties – their interest will likely wane when they figure out how little money there is in workers comp, leaving you high and dry.
3. If you are an analyst, monitor pricing and medical inflation, especially the components of inflation (frequency and utilization) more than unit price. That is where renewed inflation will first appear.
May
27
