Reuters is reporting that shares of Aetna and Wellpoint “slid on Wednesday and weighed on industry peers despite the fact that both posted strong quarterly earnings and raised their 2010 forecasts.” “A main reason for the industry’s uncertainty about the impact of the U.S. healthcare overhaul is that rules determining how much the health insurers must spend on medical costs have yet to be determined. Those details are expected to be ironed out in the next couple of months.”
Wellpoint, the nation’s largest insurer by membership, “reported a 4% increase in profit for the second quarter that helped generate earnings of $1.6 billion since the beginning of the year – a 26% increase over the same period in 2009″ and Aetna said its “second-quarter profits rose 42 percent, with a net income of $491 million, compared with $346.6 million for the same quarter last year.”
Both companies also reported lower medical-loss-ratios, as enrollment numbers declined. Kaiser Health News has this breakdown:
For the quarter, Aetna’s combined medical-loss ratio for its commercial, Medicare and Medicaid businesses was 81.8 percent, compared with 86.8 percent in the same quarter last year. The ratio for its commercial business declined to 80.1 percent for the second quarter from 85.9 percent for the same quarter in 2009…[Wellpoint] said it spent 82.9 percent of customers’ premiums on medical care during the second quarter, down from 83.9 percent during the same quarter a year ago. For all of 2010, WellPoint now expects its so-called medical loss ratio to be 83.9 percent, down from its April forecast of 84.3 percent.
In other words, insurers earned more partly because they spent less on medical care and some Democrats in Congress are already arguing that these profits should preclude insurers from raising premiums next year. “Wellpoint and Aetna are on track for great years with multi-billion dollar profits. Now it’s time for them to return those windfalls to their enrollees in the form of reduced premiums. With business booming, there is no excuse for any premium hikes or benefit cuts next year by Wellpoint or Aetna in their private sector or Medicare Advantage plans,” Rep. Pete Stark (D-CA), Chairman of the Ways and Means Health Subcommittee said in a statement.
The MLR indicator is closely watched by Wall Street investors as a sign of insurer profitability and companies have spent years strictly defining “medical care” to ensure that the so-called “loss” to profit is not too great. But now that the health care law will require insurers to spend at least 80 percent of premiums on medical care, and 85 percent for large group plans, insurers are lobbying to expand the definition to include services they had previously classified as “administrative.”
It’s unclear why insurers’ medical loss ratios are decreasing just as the government is preparing to issue new, presumably more stringent regulations. Are beneficiaries spending less on health care during an economic downturn or are insurers dropping sicker patients, stashing cash away in reserves, and investing in other business activities? The lower the MLR rate today, the more insurers would have to spend on medical expenses to meet the new requirements (if they’re at 80% today, they’ll have to jump 5 percentage points to get to 85%, which is far more difficult than starting at 84% and moving just 1 point to the new requirement). But this lower starting point gives insurers the opportunity to whine about “unreasonable” government regulations and could even convince the Secretary to use her discretion to lower the target rates. If she doesn’t of course, it could all backfire.