Insurers post robust profits for the second quarter

Almost all major health insurance companies have reported balance sheets brimming with black ink.

By Robert Kazel, amednews staff. Aug. 25, 2003.

Springtime brought a bumper crop of profits for most of the nation's large, investor-owned HMOs, and several even reported record-breaking financial results for the second quarter.

Just about all of the leading health care payers met or surpassed their stated profit goals by raising premiums, redesigning products to shift costs to patients and cutting overhead. All insurers also benefited from an apparent decrease in medical cost acceleration.

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The largest profit gain was reported by Cypress, Calif.-based PacifiCare Health Systems Inc., which had net income of $73 million in the second quarter, ending June 30, a 260% increase compared with profits of $20.3 million a year earlier. This profit was accompanied by a drop in total medical membership to 2.9 million, down from 3.3 million. The company attributed its jump in profits to "disciplined pricing" of insurance policies, an improvement in its medical loss ratio -- to 83.8% from 87.5% a year before -- and slowing medical inflation.

The numbers seemed to bolster the company's assertion that it was on a clear course of recovery after having posted a net loss of $839 million for the last half of 2002. PacifiCare's revenues remained roughly flat for the second quarter of 2003 compared with a year earlier, about $2.7 billion.

Indianapolis-based Anthem Inc. reported a net income of $177 million for the second quarter, up nearly 67% compared with the second quarter of 2002. Revenues for Anthem were $4.1 billion, nearly double the $2.8 billion reported a year earlier.

Much of the increase in revenue was attributable to the acquisition of Trigon Healthcare in July 2002, but excluding the positive effect of that merger, Anthem's revenues still increased by 10%. It had a membership gain of 10%, not including the added patients from Trigon.

New products hold key

Insurers are increasing profits as they learn how to succeed in tailor-making health plans to employers, which today typically means selling companies budget-minded products that require patients to pay more, said Ken Abramowitz, an analyst with the Carlyle Group, a New York investment firm.

"In the old days these companies used to sell one HMO at one price point, and the client would buy or didn't buy," he said. "Now there is a broad [range] of products and prices. There is a price point for everyone."

PacifiCare reported the largest profit gain, 260%.

The financial picture at Louisville, Ky.-based Humana Inc. also improved, with a 53% gain in net income compared to that of a year ago. Profits rose to $69.3 million, up from $45.4 million in the second quarter of 2002. Revenues climbed 6%, to $3 billion from $2.8 billion a year before. Its enrollment remained roughly flat overall, however, as Medicare+Choice membership decreased more than 8% from a year earlier.

The only major insurer with disheartening news for investors was Philadelphia-based CIGNA Corp., which reported a net loss for the second quarter of $53 million, compared with a net gain of $214 million a year earlier. The company had revenues of $3.9 billion in the second quarter, nearly the same as a year earlier, but its health care segment was a vexing drag on its overall financial results: Earnings for the second quarter were $108 million, about half of the $229 million reported a year before.

The company said failure to earn a profit was not a reflection of a substantial snag in the company's continuing recovery, but stems from a $286 million after-tax charge relating to reinsurance operations and from errors caused by a new claims processing system. The system was introduced last year and spurred doctors and hospitals to refile for millions of dollars in reimbursements that may be due them.

Difficulties encountered by employers or plan members in dealing with CIGNA also have made it hard for the company to justify premium hikes, according to Abramowitz. If many customers are dissatisfied, "it's not so easy to go to clients and demand a 15% price increase," he said.

Medical membership for CIGNA declined to 12 million for the second quarter, down 8% from 13.1 million a year before.

Solid second quarter for many

Other health insurers reported a solid second quarter:

Aetna Inc. of Hartford, Conn., had an increase in profits of 27.7% from a year earlier, and its executives pointed to the solid numbers as further proof that the company, once struggling to stay in the black, was well on its way to recovering. Net income rose to $138 million from $108 million. The company realized financial gains from its recent strategy of systematically moving to a smaller and more profitable customer base; enrollment was pruned to 4.7 million from 5.9 million a year ago. Revenues declined to $4.5 billion from $5.1 billion in the last year. But the number of members in the plan was about the same as during the first quarter of 2003, and the company said much of its deliberate shrinkage had already been accomplished.
Minneapolis-based UnitedHealth Group reported revenues of $842 million, up 36% from $620 million a year before. Revenues were $7.1 billion, up 17% from $6.1 billion.
Los Angeles-based HealthNet, a major insurer of the U.S. military, had net income of $74.5 million, up 15.1% from $64.7 million a year before. Revenues climbed to $2.8 billion, up from $2.6 billion.