Managed care's profits come from physician pockets

HMO stocks are going up in a down market, and doctors appear to be paying the price.

Editorial. Sept. 2, 2002.

It's a kick in the teeth to physicians to see how their investment returns have gone down in this volatile stock market. What's an additional punch in the gut is to see which stocks are bucking the trend -- managed care companies.

Wall Street is rewarding the plans, in part, for their efforts to keep medical costs -- including payments to physicians -- as low as possible.

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As of Aug. 15, the Dow Jones Industrial Average was off 12% from the start of year, the Standard & Poor's 500 Index was down 19% and the already battered Nasdaq National Market had fallen 31%. Meanwhile, stocks of eight of the largest managed care companies were up a collective 19%. And that's after a decline from their June peak.

Right now, Wall Street is putting out warnings about how many companies' second-quarter earnings would suffer because of general economic trends and a greater scrutiny of profit-inflating accounting tricks. Meanwhile, managed care companies are reaping increasing profits and benefiting from a feeling that health care is a safe investment.

Wall Street analysts expected managed care companies to meet or beat their expectations for the second quarter; through mid-August, most reported large profit gains -- even Humana Inc., one of managed care's Wall Street laggards, announced a 19% jump in its second-quarter profits.

Usually the second quarter is an uncertain time for managed care companies because it's the first in which clear signs indicate whether premium revenue is going up. In Wall Street's eyes, it's become very apparent that the past few years' 10% to 40% premium increases -- depending on the managed care company and its payers -- are indeed pushing up premium revenues.

It helps that fewer insurers are controlling more local markets -- as seen, for example, with the recent mergers establishing dominant Blues companies like WellPoint Health Systems and Anthem Inc. Also, plans, including Aetna, have dropped out of what they consider to be unprofitable markets.

Wall Street also loves when managed care companies reduce medical-loss ratios. That figure is computed by dividing reimbursements, including payouts to physicians, by premium collections. The lower the number, the better.

For an example, look at Anthem: Its stock value is up 21% this year, and so on July 23 it was added to the S&P 500 index as a reward for its increasing market value. In the first quarter of 2001, the Indianapolis-based company had a medical-loss ratio of 85.2%, already low compared with its peers. For the first quarter of 2002, Anthem pushed that ratio down to 84.5%.

Physicians have a strong suspicion that Anthem is shifting its cost burden onto their backs. On July 11, the American Medical Association, joined by 19 state and specialty societies, sent a letter to Anthem President and CEO Larry Glasscock. In it the organizations said they were "deeply concerned" that Anthem appeared to be misapplying current procedural terminology codes, resulting in inappropriately denied payments to physicians and other health care professionals. For good measure, the AMA and the other organizations sent Glasscock a copy of the current CPT book and the CPT Process booklet, given that Anthem's actions indicate it doesn't have these resources at hand.

Two weeks later, Anthem Medical Director Samuel Nussbaum, MD, responded by saying the insurer has long been working with physicians and medical societies on various concerns, and that Anthem has changed some reimbursement practices as a result of physician feedback. Still, he added, some of the concerns in the letter "are ... better addressed at the local level."

By the way, it should be noted that Glasscock was paid $15.7 million in 2001. Even considering that $12.4 million came from an incentive program built up over three years, that still leaves $3.3 million in cash payments for everything else.

Wall Street's comfort level with Anthem is obvious, so expect more of the same. As it is, Anthem is hardly alone in both its hardball treatment of doctors and its soft-touch approach on CEO pay.

It's not that physicians begrudge another's success, but they have every right to question that success when it appears to be coming at their expense.

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