Health Plans Need Government Programs

Even as private insurance companies and their advocates in Congress and the media assail proposals to expand government-sponsored insurance, health plans are relying increasingly on government programs to boost their profits. One illustration of that are the recent results of Humana.

Despite the recession, Humana’s second-quarter net income jumped 34 percent to $281.8 million from $209.9 million for the prior-year period. For the first half of 2009, Humana’s net leaped an astounding 68 percent to $487.5 million from $290.1 million in the first half of 2008.

The main reason for this difference was that pretax income in Humana’s government segment increased by 62 percent to $404.7 million in the second quarter, and more than doubled to $570.8 million in the first half. The Q2 improvement was attributed to “lower PDP [prescription drug plan] claim expenses, a 13 percent increase in average Medicare Advantage membership and the implementation of member premiums for most of the company’s Medicare Advantage products.”

Humana’s Medicare Advantage membership grew to 1.5 million by June 30, 2009, an increase of 12 percent from the prior-year period and 4 percent from the end of 2008. Medicare Advantage premium revenue jumped 19 percent to $4.15 billion as the result of membership growth and the introduction of premiums in markets where there had previously been none. Standalone PDP premium revenue dropped 29 percent, partly because many seniors converted from drug plans to Medicare Advantage plans that produce higher revenues for Humana.

Overall second quarter revenue increased 7 percent to $7.9 billion. Revenue for the first half of 2009 rose 9 percent to $7.9 billion. Besides higher Medicare Advantage volume, Humana also enjoyed a 15 percent increase in military services premiums and administrative service fees. But that business is likely to drop significantly because Humana recently lost a Tricare contract for the southern region.

On the commercial side, like other insurance companies, Humana saw a drop in earnings and enrollment during the first half of 2009. Pretax earnings for the segment decreased by 53 percent to $35.3 million in the second quarter and by 20 percent to $162.9 million for the first six months of the year. Enrollment in Humana’s commercial plans declined 3 percent to 3.45 million in Q2, compared with the year-earlier period, and 5 percent from the end of 2008. Premium revenue rose only 1 percent to $1.87 billion in the second quarter, despite acquisitions that Humana made in the latter half of 2008.

It’s particularly revealing to compare Humana’s results with those of WellPoint, which reported that its second-quarter net income decreased 7.5 percent to $693.5 million. WellPoint’s total medical membership dropped 3 percent to 34.2 million people from June 30, 2008 to June 30, 2009. The biggest component of that decline was the 734,000 members lost in the “local group” business, principally because of the recession. WellPoint’s “senior” and “state-sponsored” membership (Medicare and Medicaid) dropped 5.4 percent and 14.4 percent, respectively, but were relatively small compared to the insurer’s commercial business.

What’s interesting about this comparison is that private insurers that rely more on government programs are doing better than those that have less government business. UnitedHealth Group, which also did well in the second quarter, attributed those robust results partly to “strong growth in risk-based products in the public and senior markets business.” Even though CMS plans to cut back reimbursement of Medicare Advantage plans by 4.5 percent next year, government programs will continue to benefit insurance companies.