The nation’s biggest health insurers continued to build financial momentum through the first half of 2013, as strategies for contending with the implementation of key health care reform provisions next year became clearer.
The five largest publicly traded U.S. health insurers increased their combined total revenue through June 30 by 12.4% year over year, to $154.2 billion, according to Business Insurance‘s analysis of company reports.
First-half net profit among the market’s leading insurers — Aetna Inc., Cigna Corp, Humana Inc., UnitedHealth Group Inc. and WellPoint Inc. — grew 9.9% over same-period results reported in 2012, to $6.6 billion, aided in large part by lower-than-expected utilization and a heightened focus on controlling medical cost trends, analysts said.
“I would say performance for these companies was very impressive, particularly in the second quarter,” said Tom Mason, a Charlottesville, Va.-based senior financial analyst at SNL Financial L.C., noting that all five top-tier insurers outperformed his firm’s estimates in the most recent quarter.
“In general, we saw a lot of positive reserve development, and keeping medical costs under control was a major theme,” Mr. Mason said.
Overall, the market’s largest insurers reported a 14% increase in their combined total medical enrollments through the first six months of the year. However, analysts said the year-over-year growth in total revenue was mainly driven by increased membership in market leaders’ Medicare Advantage and Medicaid segments, which collectively grew by 32% over totals reported in 2012, compared with 8.5% growth in total commercial medical enrollments.
Having completed its acquisition of Coventry Health Care Inc. on May 3, Hartford, Conn.-based Aetna nearly doubled its footprint in government-funded plans.
“The Coventry deal provides Aetna with critical mass in Medicare Part D as well as material Medicaid exposure, shifting the book more heavily toward government programs,” Jennifer Lynch, a research analyst at New York-based BMO Capital Markets, said in a note to investors. “While we view government program revenue as more risky than commercial premium, it would be naïve to ignore the growth opportunity presented by entitlement program participation.”
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Although they comprise less than 15% of the five leading insurers’ combined total medical membership, government-based medical enrollments accounted for 48.1% of the revenue collected through the first half of 2013, up from 43.1% a year ago.
“That’s been the trend over the last couple of years,” said Vishnu Lekraj, a Chicago-based senior research analyst at Morningstar Inc. “Excluding the individual mandate and the uninsured coming to the market as a result of that, the biggest growth opportunities for health insurers are going to be the Medicaid market and, just as a matter of demographics, the Medicare Advantage market.”
Beyond much slower growth in enrollments, analysts said another factor driving down insurers’ commercial group revenue is the rising number of employers electing to self-fund health benefit plans for active employees and pre-Medicare retirees. Through the first six months of 2013, administrative service-only enrollments among the largest health insurers increased by a combined 10.4%, to 67.1 million lives.
Minnetonka, Minn.-based UnitedHealth Group alone added 4.9 million lives to its ASO enrollments in the first half of the year, about a quarter of which had previously been enrolled in fully insured plans.
“ASO products carry greater profitability on a percentage basis, but it’s also going to bring in fewer gross premium dollars,” Mr. Lekraj said. “With the growth in employment and the broader pick-up in the economy, you will see more and more membership growth in the ASO products.”
Although health insurers reported a strong first half, analysts said the industry’s true test still lies ahead in the form of new regulations under the Patient Protection and Affordable Care Act set to take effect in 2014 and, more immediately, the public health insurance exchanges due to open in the fall.
“The big thing these companies are going to be looking at in the second half of the year is how the individual insurance exchange market works out, and how they each fit into that market in terms of their execution, pricing, membership growth opportunities and their participation levels,” Mr. Lekraj said.
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So far, some top-tier insurers have signaled more confidence in the short-term viability of the public exchanges than others. UnitedHealth, WellPoint and Humana have each stated they intend to participate in as many as 14 state-based insurance exchanges.
In recent weeks, Aetna has withdrawn several rate proposals it had submitted to state and federal insurance regulators, citing prohibitive limitations placed on premiums. Similarly, Cigna has signaled its desire to let the public exchanges mature a bit before entering the marketplace.
“While Cigna is taking a wait-and-see approach to public exchanges, that distribution channel is appealing to the company,” Ms. Lynch said. “Cigna plans to dabble in private exchanges and intends to create a proprietary marketplace as well.”
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.