Market Bulls Support HMO Profits

March 23, 2007
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LANSING — West Michigan’s two largest health maintenance organizations, Priority Health and Blue Care Network, spent $2.3 billion combined on medical and hospital expenses in 2006, according to financial statements filed with the state this month.

Both nonprofit HMOs relied on investment income to offset a soft year in net results from underwriting. Both reported 2006 net incomes significantly lower than 2005.

Priority Health’s HMO business saw its net underwriting gain drop from $47.9 million in 2005 to $8.6 million last year. But 2006 brought investment gains up to $13.7 million. Net income was reported at $22.3 million for 2006, down from $57.8 million in 2005, a slide of 61 percent.

Across all its business lines, Priority Health’s net income for 2006 was $23.9 million, a 56.5 percent slip from 2005’s $55.1 million. The total premium revenue was $1.2 billion.

“It still was a fairly strong year,” President and CEO Kim Horn said. “There’s a big emphasis in our organization in trying to maintain premiums (percentage price increases) in the single digit range. Insurance earnings are very cyclical. It’s not going to be as strong as the last couple of years.”

Horn said this year’s annual premium price increases have been 8 percent to 9 percent, held down by cost-reduction measures such as disease management and “consumer-enhanced” products.

“We’ve been real pleased with the results of them in the face of rising costs and economic pressures that exist in all industries,” she said.

Blue Care Network’s underwriting loss of $3.5 million was cushioned by a strong gain in investment income of $31.8 million. Net income was $28.4 million, compared to $78.4 million in 2005, a 64 percent drop.

“They actually dropped because our premium rate increases were below medical trends and we’re really trying to keep our product affordable for employers and individuals in Michigan, which ended up being a smaller margin,” said Jeanne Carlson, president and CEO of Blue Care Network. Last year’s average premium increases were below 10 percent, Carlson said, and in 2007 the average increase is around 7 percent.

Carlson credited 2006’s “good market” for the strong investment returns.

“We’re going to do as much as we can at Blue Care Network to try and manage health care costs,” Carlson added, citing the fourth-quarter introduction of Healthy Blue Living, a product that encourages members to lead healthy lifestyles.

Blue Cross Blue Shield of Michigan, Blue Care Network’s nonprofit parent company, also banked on investment gains to prop up the bottom line.

Blue Cross Blue Shield of Michigan announced a drop of $127 million in consolidated net earnings for 2006. The company said it’s relying on positive outcomes in two for-profit subsidiaries and investment income to offset the red ink in underwriting.

Consolidated net earnings fell to $210 million in 2006, down from $337 million in 2005. That covers revenue from the nonprofit’s health insurance business, investment portfolio and for-profit and nonprofit subsidiaries, including Blue Care Network.

Consolidated investment earnings of $265 million combined with total net income of $34.4 million at two for-profit subsidiaries to offset losses of $127 million in Medicare. Net income was $33.3 million for Accident Fund Insurance of America and $1 million for DenteMax, two for-profit subsidiaries.

The underwriting margin was at one-tenth of 1 percent, which President and CEO Daniel Loepp stated is appropriate for the nonprofit health coverage provider.

BCBS total revenue in 2006 was $16.3 billion and the company paid out $14.6 billion in claims. Medicare Advantage and Medicare Part D prescription products created $575 million in new revenue.

Blue Cross Blue Shield provides or administers health care benefits to 4.8 million members and is the largest coverage provider in Michigan. Blue Care Network counted 482,998 members in 2006. Priority Health pegged total 2005 membership at 416,797, with 344,469 in the HMO.

Priority Health is in the process of buying Care Choices, a Detroit-area HMO, from Trinity Health. Care Choices reported a 2006 net income of $1.8 million on $305.3 million of total revenue. It reported an underwriting loss of $2.9 million, but posted $3.2 million in investment gains. It had 91,888 people enrolled in 2006, down from 100,504 in 2005.

Another local HMO, Grand Valley Health Plan, employs its own medical staff and operates its own clinics and an outpatient surgical center, unlike the area’s other HMOs, which create networks of independent health care providers. GrandValley overcame 2005’s $438,045 net income deficit to end 2006 $407,302 to the good.

GrandValley’s membership has steadily dropped, from 19,561 in 2002 to 11,698 in 2006.

President and CEO Ron Palmer said 2006 was the first year in which GrandValley restructured its premiums based on ages of group members, to be more in line with options that others are offering. That has prompted some employers, whose work force is older and thus face significant premium increases, to opt out of GrandValley, Palmer said.

“We needed to go after the same approach,” he said. “We had older populations where there was going to be a very large rate increase. They didn’t like that, so they dropped out of the plan. We’ve also gotten recently some effect on the other side. Now we’re much more competitive or interesting to people that have a younger population.”    

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