Coventry’s latest quarter was a good one. The key to financial success in the health plan business is the MLR, or medical loss ratio; Coventry delivered a Q2 MLR of 77.5% resulting from a combination of higher premiums and lower than expected medical claims. Premiums were up 5.1% YTD, while the medical expense increase was slightly lower at 4.9%.
Medical trend rates are indeed favoring health plan operators, with 2006 results improving dramatically from an industry-wide high of 13.9% in 2003 to 7.7% in 2006.
As long as the trend rates keep dropping, health plan results will do nothing but improve. The driver is what Bob Laszewski terms “trend windfall”; employers assess their latest renewal rates by comparing them to their increase last year. Thus, when trend rates are dropping, health plans are able to drop their premium increases while still increasing the ‘spread’ between expected losses and premiums.
All is great, until the trend rate bottoms out and starts heading back up. And that is an inevitability.
And that may be starting. Coventry’s Q1 numbers indicated an medical trend rate of 4.8% with premium rate increases of 5.6%; the fractions aren’t nearly as significant as the narrowing of the spread between the rate increase and medical trend; from Q1 to Q2 the spread dropped from 80 basis points to 20.
What does this mean for you?
Health plan profits have been quite strong for several years, and we may be seeing the beginning of the end of the ‘happy days’.
