HMO Earnings May Ease Rate Hikes

September 28, 2004
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GRAND RAPIDS — Strong profits through the first half of 2004 should lead to smaller premium increases next year for the two health-maintenance organizations that dominate the West Michigan managed care plan market.

Both Priority Health and Blue Care Network, the HMO for Blue Cross Blue Shield of Michigan, reported substantially higher earnings at midyear and, after years of double-digit annual premium increases, anticipate 2005 renewals with increases below 10 percent.

“We’re trying to keep premiums in the single digits,” said Rob Pocock, corporate communications director for Priority Health.

A quick consumer adoption of high-deducible HMOs and an aggressive push to control pharmacy costs enabled Priority Heath to more than double earnings for the first half of this year over 2003.

The Grand Rapids-based managed-care company recently reported net income of $29.1 million for the first six months of 2004, a 119 percent increase over the $13.2 million during the same period a year earlier, according to quarterly financial reports filed with state regulators.

That equates to a margin of a little more than 6 percent for the non-profit Priority Health, the market leader among HMOs operating in western Michigan

The 6 percent margin came on total revenues of $458.9 million from the January-to-June period, which compares to $372.5 million a year earlier, and is double what Priority Health budgeted for the year.

Pocock said a third of the margin is attributable to renegotiating contracts with pharmacies and increasing the dispensing rate for lower-cost generic medications.

Even with the higher use of generics and other cost-control efforts, Priority Health’s payout for pharmaceuticals grew 12.7 percent from mid-year 2003 to mid-year 2004, from $73.7 million to $83.1 million.

Another single percentage point of the margin growth during the first half of 2004 came from the strong sale of high-deductible HMOs, a product introduced in early 2003 in the wake of legislative action to allow their sale.

The sale of lower-cost deductible HMOs took off in 2004 as employers renewed their health plans. Of more than 356,000 people enrolled in a Priority Health HMO plan, Pocock said some 100,000 are in a high-deductible product.

While Priority Health’s margin for the first half of the year does represent a major gain when compared to the same period in 2003 — and should help the company keep premium increases for 2005 under 10 percent — Pocock said he expects the earnings gain to temper during the latter half of 2004 as subscribers reach their deductible.

“Now that most people have probably met their deductible, our costs will go up and more of their costs will be paid by the health plan,” he said.

At Blue Care Network — which has about 50,000 West Michigan subscribers — net income for the first half of the year totaled $30.8 million, more than triple the $9.2 million during the same period in 2003, according to the HMO’s second quarter financial report filed with the Michigan Office of Financial and Insurance Services.

Blue Care Network registered a margin of 4.3 percent on total revenues of $698.1 million, which grew 3 percent over the $678.1 million during the same period last year, even as the HMO’s subscriber base continued to slide.

Enrollment at Blue Care Network is down statewide by more than 13,000 since the end of the 2003, falling from 478,043 to 464,509 as of June 30, 2004, according to the HMO’s regulatory filing.

The earnings growth recorded for the first half of 2004 builds on the continued improvement of Blue Care Network’s financial performance. Blue Care Network lost some $500 million over a five-year period before reaching the break-even point a few years ago.

“It looks like it’s going to be a pretty good year for us financially,” Blue Care Network President and CEO Kevin Seitz said.

That improved financial performance should enable Blue Care Network to deliver 2005 renewals with premium increases in the single digits, well below the 12 percent to 15 percent trend average of the recent past, Seitz said.

Seitz attributed the dramatic increase in net income largely to improved pharmacy management, particularly the growing use of generics.

Blue Care Network is seeking to rebuild market share in West Michigan, which is about half that of five years ago, through improved benefit design, better customer and claims service and “pretty competitive pricing,” the latter of which is made possible through strong financial performance, Seitz said.

Rather than steer earnings into reserves, Blue Care Network now plans to use the improved financial performance to offer more competitive rates.    

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