Commentary | Health

Health insurance providers find ways to prosper as more people lose coverage

UnitedHealth Group Inc., the largest U.S. health insurer, last month reported that its second quarter profit more than doubled to $859 million, while its revenues surged 79% even as enrollments fell. In other words, the company made more money from fewer people. Not every health insurer had such strong results, but a look at recent second quarter earnings reports shows that most continue to earn large profits even as the economy stagnates and tens of millions of Americans go without health insurance.

The comments these insurance company executives made to Wall Street offer an enlightening account of how they plan to grow their profits and how attention to the bottom line trumps their ostensible mission of providing affordable health care to all Americans. This view was articulated most clearly by Aetna Inc. CEO Ron Williams, who said on a conference call with industry analysts, “We would be willing to forgo membership growth if necessary. We have a clear bias toward profitability over growth.”

Because each health insurer has a unique mix of medical, dental, and prescription drug operations as well as different combinations of Medicare, Medicaid, and employer-sponsored enrollees, each has its own strong points and problem areas. What unites them all is a determination to profit from whatever economic trends emerge in the future. This is, of course, to be expected from publicly-traded companies with a legal responsibility to maximize earnings to shareholders. It does, however, illustrate how efforts to profit from health care can be inherently at odds with making health care widely available and affordable. These two cross purposes become most apparent when the health industry addresses the financial community.

Some highlights:

More cutbacks in coverage are on the table.  Aetna, which earned a $347 million profit in the latest quarter but saw earnings drop 28% from year-ago levels, told Wall Street analysts that “provider behavior changes” contributed to the increased costs that resulted in lower profits. “While this behavior seems generally permissible under current reimbursement arrangements, it does deviate from prior practices,” said CEO Ron Williams. “It’s being addressed.”

Higher costs are causing many people to drop their insurance. Most people know this, but when the trend is confirmed by the very business selling the insurance, it carries more weight.  Coventry Health CEO Allen Wise recently told Wall Street analysts that the company started a proactive “pricing push” in the beginning of 2008. While the pricing push itself was successful, Wise said, “We paid a real price with renewals.”

By insurers’ own admission, lack of health insurance contributes to higher medical costs. Asked whether new enrollees who had picked up coverage after a period of being uninsured had contributed to higher costs, Aetna’s Williams concurred. “We always see that pressure to some degree of people coming in from being uninsured, and we factor that into our rates,” he said. (EPI research has addressed the costly problem of people churning in and out of coverage, pointing out that even people who do have employer-sponsored insurance frequently spend part of a year uninsured because of job changes).

Many unemployed can’t afford COBRA. United Healthcare’s Helmsley said the company’s COBRA take-up rates – the portion of enrollees who had retained their insurance by paying all the costs out of pocket after losing a job – were “roughly in the 20% range.” Translation: the majority of people who left their jobs did not keep their insurance. A new study shows government subsidies provided under the Recovery Act have made COBRA affordable for more laid-off workers, but many continue to decline coverage. (A recent EPI analysis shows how COBRA is prohibitively costly for many Americans, and even with the subsidy, represent a high portion of unemployment benefits).

Even as they protest the creation of a public health insurance option, many insurers profit from rising unemployment and increased Medicaid and Medicare enrollment. “Every 1% rise in unemployment is somewhere around 50,000 additional lives that are added to our books,” said UnitedHealth’s Helmsley. He added: “We expect this year’s revenue growth in public and senior business to continue to more than offset the potential for further pressure in the employers’ market.” Insurer Humana Inc. has reaped huge profits from its Medicare business, which has also helped offset declining enrollments and cost pressures in its commercial business.

Cost cutting is planned to achieve further growth in the face of worsening economy. Cigna Inc grew its second quarter profit to $313 million from $303 million last year and continues to target a $1 billion operating profit for all of 2009, despite a tough combination of rising costs and declining enrollment. In a conference call, Cigna executives said they expected unemployment to rise to between 10.5% and 12% by year end, resulting in a membership decline of 5% to 5.5%. They said they would cut costs and outsource certain operations to keep profit projections on track.

Pharmaceuticals remain hugely profitable. Earnings at UnitedHealth’s prescription drug benefit unit grew 77% in the latest quarter.

See related work on Employer coverage | Health

See more work by Andrea Orr