Analysts focus on insurers' health outlays

Despite rising profits, Wall Street is pressuring health plans to do something about rising medical-loss ratios.

By Emily Berry, AMNews staff. Feb. 25, 2008.

All but one of the country's biggest publicly traded health plans reported that their profits grew by more than 10% in 2007.

But in calls with executives reporting fourth-quarter results, financial analysts focused on plans' rising percentage of how much of each dollar is spent on health care.

While insurers offer no specific ideas of how they will reduce what is commonly called their medical-loss ratio, the pressure from Wall Street raises the specter of higher premiums for patients, reduced reimbursement for physicians, or both.

Medical-loss ratio is of interest to Wall Street because analysts use it "to determine what the long-term future of a firm is likely to be," said Doug Sherlock, a Gwynedd, Pa.-based health plan consultant. The number is critical to long-range performance because plans typically negotiate premiums once a year, and if costs rise sharply, it's impossible to immediately react by repricing contracts with government and employers.

The two largest private-pay plans, WellPoint and UnitedHealth Group, came under particular scrutiny.

WellPoint's fourth-quarter earnings, up 7.2%, fell short of analysts' expectations, especially since the Indianapolis-based company's increase came in part because of $1.8 billion in stock buybacks. The company reported a fourth-quarter medical-loss ratio of 82.9%, up nearly two points from the end of the third quarter. The news caused its stock to drop nearly 9% in the first two days after its Jan. 23 earnings release.