With enrollment for a portion of the country's new health care
program set to begin Tuesday, a growing number of employers have
begun restructuring their insurance programs to adapt to the
) said Sept. 18 it would move health coverage for 120,000 of its
employees to private health exchanges, where they can choose from
a menu of plans.
Earlier in the month,IBM (
) andTime Warner (
) announced they would shift their retirees off company-sponsored
health plans to private exchanges.
The stocks of many managed-care insurers didn't take the news
well. Starting Sept. 17, the group tipped into a three-day slide
that trimmed 6% fromUnitedHealth (
) andAetna (
), and 7% fromWellPoint (WLP) -- the three largest managed-care
insurers, measured by market capitalization.
The group recovered a portion of those losses after a series
of analyst reports explained the trend is likely to be a net
positive for big insurers. But the group has had a good run so
far this year -- Aetna was up 40%, WellPoint up 38% and
UnitedHealth ahead 33% year-to-date through Thursday.
Goldman Sachs analyst Matthew Borsch noted that the "Big Five"
insurers UnitedHealth, WellPoint, Aetna,Cigna (CI) andHumana
(HUM) could generate $1 billion a year in added pretax earnings
if 13 million people shift to the new model by 2019.
Under the private-exchange model, employers give beneficiaries
a lump sum to buy their own coverage. They can shop around.
Managed-care firms need to compete for the private-exchange
"Some may lose, some may gain," said S&P IQ equity analyst
Phillip Seligman in a phone interview.
Public exchanges serve a different purpose. They're designed
to provide affordable health coverage to the millions of
uninsured Americans. The exchanges are a key part of the
Affordable Care Act signed into law in 2010, known as
The uninsured unable to pay for insurance in the public
exchanges will get a subsidy from the government. The exchanges
are mostly seen as unprofitable endeavors, at least in the early
years, and the fear is that the sickest and neediest will flood
state exchanges and place upward pressure on medical costs.
Baby Boomers Meet Medicare
Managed-care companies have other things working in their
favor. Health-cost increases have continued to fall as consumers
put off or cut back on doctor visits and hospital procedures to
keep down their out-of-pocket expenses. The trend has meant
insurers don't pay out as much in claims, which increases their
Health insurers' business model is partially based on managing
costs through preventive programs and chronic-disease management.
They are increasingly applying best practices'
clinical-management models to optimize care. They're further
tamping down costs through internal cost-cutting and efficiency
In addition, they have been gaining new business from rising
enrollments as baby boomers start to sign up for Medicare. Many
are choosing the Medicare Advantage option offered by
managed-care firms. It's a trend expected to last for years as
more members of the 80-million aging cohort retire.
However, recent cuts in government reimbursements to Medicare
Advantage plans are a concern, so volume gains are seen as
In a recent meeting hosted by Jefferies Group, UnitedHealth
CEO Stephen Hemsley said that 65-year-olds are choosing Advantage
plans at the highest rate in the program's 10-year history, at
But Hemsley's near-term view in the face of a 5% rate cut was
"more reserved," Jefferies analyst David Windley wrote in a note
about the meeting.
In a mid-July conference call, Hemsley said UnitedHealth
expected some impact on revenue growth next year due to pressures
in Medicare Advantage.
UnitedHealth plans to withdraw some of its Advantage plans in
the 2014 fiscal year, affecting 5% of its Advantage
Thanks in some part to its ties with AARP, formerly the
American Association of Retired Persons, UnitedHealth has the
largest market share in Medicare Advantage, with 21% enrollment
share, says Wells Fargo Securities. Humana follows with 16% and
Aetna with 6%.
WellCare is gaining share in Medicare's Part D
prescription-drug coverage, according to Wells Fargo. But its
total market share still trails other insurers.
On the Medicaid side, states are continuing to shift their
Medicaid populations to managed care. Meanwhile, ObamaCare
expands Medicaid's eligible patient pool.
"Over time (Medicaid) should be profitable as managed-care
organizations control the medical cost of this population," said
Aetna gained a larger presence in states' Medicaid volume from
its big acquisition of Coventry Health Care earlier this year.
Other consolidators in the industry over the last two years
include WellPoint, which acquired Medicaid-focused Amerigroup in
December; and Cigna, which bought Medicare Advantage player
HealthSpring in early 2012.
Molina Healthcare (MOH) andWellCare (WCG), both big Medicaid
players, are especially benefiting from states' shift of Medicaid
patients to managed care, Seligman says.
Molina andCentene (CNC) have a big Medicaid business in Texas,
where rates have been going up.
Centene shares are up a whopping 57% so far this year.
WellCare has logged a 43% gain and Molina has climbed 33%.
Barclays analyst Joshua Raskin sees additional growth. He
wrote recently that rate increases in the Lone Star State are
high enough to support his "earnings power thesis" for plans with
material exposure to Texas. Rates for the large adult cohort were
raised 3.2% for the 2014 year, on top of a 2.1% hike in 2013.
Raskin estimates that Texas accounts for about 36% of revenue
for Centene and 19% for Molina.
Public Exchanges On Trial
Public exchanges -- one of the most contentious elements of
ObamaCare -- are expected to open for business in January.
Supporters of the plan have enlisted an army of vote-getters
to go door-to-door and persuade particularly the young and
healthy to sign up when enrollment begins Tuesday. Opponents
within the GOP have taken out ads to discourage
"The big question is how many will sign up," said Seligman. A
second big question: how many younger, healthier people will sign
up to offset higher medical costs from the sickest group, he
Another key part of ObamaCare, the employer mandate, was
postponed until 2015. Employers with 50 or more workers will be
required to provide affordable health coverage to full-time
employees who work at least 30 hours a week, or face fines.
Home Depot (HD) and Trader Joe's plan to shift medical
coverage for part-time workers to the public exchanges, from
limited liability plans.
Big insurers including Aetna, UnitedHealth and WellPoint have
opted out of a number of the state-based exchanges, waiting to
see whether the number of healthy enrollees is enough to offset
the cost of an expected surge of needier patients.
Aetna's CEO Mark Bertolini said in a July 30 conference call
that his firm would take a "cautious approach" to public
exchanges as it evaluates their longer-term viability.
UnitedHealth, taking a similar approach, "will not be an early
mover in the (public) Exchange channel," wrote Windley, adding
that management is concerned over low participation and adverse
selection in the first two years. The company opted out of
Health Net (HNT), on the other hand, looks chiefly to
California for growth under ObamaCare, particularly the state's
"dual eligible" population, those who qualify for both Medicare
Susquehanna analyst Chris Rigg upgraded Health Net to positive
from neutral on Aug. 25, saying the company was "betting the farm
on the ACA." He said the stock could double over the next 12 to
18 months if the ACA works well in the state.
Period of Moderation
Medical inflation is expected to stay at modest levels
compared to pre-recession years, at least in the near term,
constrained by modest economic growth. PricewaterhouseCooper's
Health Research Institute forecasts a 6.5% increase in overall
medical costs in 2014.
Annual premiums for employer-sponsored health coverage rose 4%
in 2013, also moderate by historical standards, reported the
Kaiser Family Foundation in another report.
"We are in a prolonged period of moderation in premiums, which
should create some breathing room for the private sector to try
to reduce costs without cutting back benefits for workers,"
Kaiser CEO Drew Altman stated.
The sluggish economic recovery has created a "new normal" in
health care spending patterns, the Kaiser report said.
Kaiser said that the ACA will play a role in the slowdown in
health-care inflation in 2014 as hospitals work to hold down
readmissions or face penalties and employers raise or lower
premiums to influence employee behavior.
Meanwhile, enrollment in Medicare Advantage plans is expected
to grow in 2014, though it's unclear by how much. Despite
predictions of enrollment declines, Advantage enrollment climbed
from 11.1 million in 2010 to 14.4 million in 2013, for a 30%
gain, Kaiser noted.
UnitedHealth's CEO said during the summer conference call that
by 2016 Medicare Advantage will be reimbursed at parity with
original fee-for-service Medicare "but will continue to deliver
better benefits and lower costs."
Demographic trends are compelling, he said, as more than 3
million people enter Medicare rolls each year.
Meanwhile, private health insurance exchanges may be primed
for growth. In a Kaiser survey of more than 2,000 small and large
employers, 29% of the largest firms (with at least 5,000 workers)
said they are considering offering benefits through a private
"These jumbo firms employ almost 40% of all covered workers,
so their interest could portend a significant shift in the way
many people get their health insurance in the future," Kaiser
Aetna plans to take part in about 15 private exchanges in
2014, and is also developing its own private exchange. Such
exchanges are now largely set up by third-party consultancies.
Other managed-care firms are expected to hop on the
private-exchange bandwagon as well.