Health Insurers Post Healthy Profits but Remain Cautious on 2011
Counterintuitively, one trend that boosted insurers' profits was the weak economy: Many cost-conscious Americans stayed away from doctors' offices to save on co-pays, deductibles, etc, and when customers don't use their policies, it's good for the insurance company. Flu-related costs also declined this year, adding to profits.
Pushback Against Health Care Reform
The five largest insurers -- WellPoint, Cigna, UnitedHealth Group, Aetna and Humana -- which along with some other competitors boasted a 250% return over the past decade, earned over $15 billion in 2010. That's 22% growth over their combined $12.2 billion earnings in 2009.
Starting this year, however, the Affordable Care Act demands insurers spend at least 85% of their income from group plans and 80% of payments from individual plans on medical care -- rather than on executive salaries and administrative costs. If the companies don't meet these requirements, they'll have to give rebates to their customers.
Insurers are fighting back, by reclassifying some expenses such as disease management as medical rather than administrative expenses, and by raising premiums. But they still expect the insurance overhaul to affect their rather healthy profits, and therefore project lower earnings in 2011 compared to 2010.
Cautious Outlook for 2011
UnitedHealth (UNH), the largest U.S. insurer by sales and the first to post results, reported a 10% growth in fourth-quarter earnings and revenue to $1.04 billion and $24.03 billion, respectively, handily beating analysts' estimates. UnitedHealth noted a "moderation in overall demand for medical services," as one reason for its improved results. The company's 2011 earnings outlook remained cautious, and was below Wall Street estimates.
But in a conference call, Wellpoint CEO Angela Braly said the company expects "to significantly mitigate this impact through top-line revenue growth and continued SG&A [selling, general and administrative] expense reductions." Also, aging baby boomers "presents a substantial growth opportunity for WellPoint."
Cigna (CI) was no different than its larger rivals, also attributing part of its $313 million adjusted quarterly profit to the trend of fewer hospital and physician services provided. And even as it widely beat analysts' expectations, its 2011 view came in below the average Street forecast. Cigna says its 2011 forecast reflects growth expectations, but also "the expected impact of current health reform regulations and some acceleration of medical services utilization during 2011."
Higher Profits Ahead?
Breaking the trend was the third-largest U.S. health insurer, Aetna (AET), which not only topped analysts' estimates when it reported fourth quarter results but also gave a 2011 view that was well above Wall Street average forecast. Aetna's profit climbed 30% to $215.6 million, even as revenue was down 2% to $8.54 billion, partly due to "lower utilization."
If these results are any indication, other health insurers such as Humana (HUM) will report similarly healthy profits and present similarly cautious outlooks for 2011, as they move to meet the new law's minimum medical-spending requirement and as demand for medical services returns to normal levels.
But judging from the stocks' outperformance year-to-date, perhaps investors believe the five could earn higher profits on possible higher enrollment and higher premiums.