Well, despite the health reform bill passed last fall with such rancor and expectation, it appears that wars between health insurers and hospitals are heating up. In more than one market, private health insurers, despite their own reported profits, appear to be squeezing hospitals. This is especially true in relation to Medicare Advantage plans, where insurers have made significant profits over the past years.
For example, in the San Antonio market, a battle has erupted between the regions leading hospital system, Methodist Healthcare and the largest Medicare Advantage HMO run by Humana. Humana officials have said that talks stalled with the Methodist Healthcare System and they would be notifying 35,000 HMO members that the five local Methodist hospitals would no longer be part of their network effective August 1, 2010. This action affects Humana’s Medicare and commercial health maintenance organizations. Those HMO’s comprise 8% of Humana’s 429,000 local customers. Other subscribers are covered by PPO’s, fee for service plans along with Tricare (military insurance). San Antonio has a large military presence. Humana blamed this action on a a difference of opinion regarding “fair and reasonable” rates relative to hospital reimbursement. In other words, they wanted to pay less than Methodist was willing to accept. Humana officials worked to posture their action behind statements regarding the local economy and a commitment to affordable health coverage.
Humana used to own three of Methodist hospitals. They sold their U.S. hospitals in 1993 to the Columbia Hospital Corp., which evolved into HCA. Methodist and HCA merged the following year, with HCA acquiring half of the local Methodist system. Methodist Healthcare Ministries, a not-for-profit foundation, owns the other 50%. Humana sent letters 2,400 customers who had been hospitalized at a Methodist facility in the last 12 months. They plan to notify the rest of the 35,000. Earlier this year, a Wall Street Journal story quoted the president of Aetna Health Plans complaining that hospital rate increases were typically in the 5% range five years ago, but that some large systems this year were currently demanding 20% or more.
Meanwhile, the San Antonio based Methodist Healthcare System blasted Humana for its decision to drop the seven local Methodist hospitals from the HMO’s network effective Aug. 1. They stated that the termination is not about Methodist’s cost but about Humana’s profits. Humana struck first in this PR battle when it issued a statement saying that 14 months of negotiations on a contract renewal with Methodist resulted in a difference of opinion with regard to hospital reimbursements. Methodist’s indicated negotiations were continuing. Methodist stated it offered to charge Humana lower rates for Humana Medicare patients than the rate which the government would reimburse Humana, allowing Humana to pocket the difference. Methodist officials argued that they felt this was a business deal for Humana and that any statement they might make suggesting that their actions benefit their policyholders is disingenuous, if not outright false. To date, Humana has declined to respond point-by-point to Methodist’s statement.
The Texas Department of Insurance data shows that Humana posted an after-tax net loss of $4.8 million in the San Antonio market last year from its Medicare and commercial HMO products. That loss, however, followed four straight profitable years where Humana earned a combined $68 million (or an average of $17 million a year in profits). In the first quarter of 2010, Humana Inc.’s earnings rose 26%, helped by a favorable reserve adjustment for prior-period medical claims, as enrollment and premium growth in the managed-care company’s government segment more than offset declines in its commercial business. Humana is one of the nation’s largest providers of privately run Medicare Advantage health plans for seniors, raised its 2010 earnings view to a range of $5.55 to $5.65 a share from $5.15 to $5.35 a share, mostly because of the first-quarter performance. The revenue target increased $500 million to a range of $33.5 billion to $34.5 billion.
Humana is not alone in this game. Other health insurers are posturing ahead of potential health reform to reap maximum profits while they can. For example, under intense pressure, Aetna Inc. withdrew its request to raise prices for individual policyholders in California by an average of 19% after “discovering a flaw in its rate filing” with state regulators, according to the California Department of Insurance. Just a few months earlier Aetna was suspended from signing up new members for its Medicare Advantage and Medicare prescription-drug plans because the insurer didn’t comply with rules about changing drug-plan designs, the government said.
Despite these “setbacks”, Aetna’s first-quarter earnings rose 29%—lifted by investment gains and the effects of lower-than-anticipated medical claims from late last year—and despite declines in the health insurer’s enrollment. The Hartford, Conn., company also raised its full-year per-share earnings outlook.
Humana in the 3rd quarter of 2009 posted a 65% jump in profit, as bulging membership and premiums from Medicare Advantage overcame their commercial products. Humana said it earned $301.6 million, or $1.78 a share, in the three months ended September 30, 2009, up from profit of $183 million, or $1.09 a share, a year ago. Revenue rose to $7.72 billion. Analysts expected profit of $1.77 a share on $7.82 billion in revenue. Humana at that time said it expected a yearly profit of about $6.15 a share on revenue of $31 billion.
The philosophy at Humana has been built on bottom line business practices. CEO Micheal McCallister in 2003 was quoted as saying that “it is important to note if we have to choose between achieving our membership goals and achieving profitability goals, profits will win every time. The following year, he reiterated the company’s priorities to the AP saying that “we will not play the market share game and will continue to price our business for bottom line profitability.” Last year, Humana, headquartered in Louisville, Kentucky, raked in $29 billion in revenue and $833 million in profits. It ranked 98th on Fortune magazine’s listing of the nation’s largest corporations. In 2009 Humana paid McCallister $2.39 million and his 2004-2009 compensation totaled $56.9 million, according to Forbes magazine. He also owns more than $60 million in Humana stock options. Apparently, Mr. McCallister’s fortunes continue to soar, as he received total compensation of $14.13 million this past year with his cumulative 5 year compensation rising to almost $69 million.
Clearly, all legitimate enterprises need to be profitable. That includes government as well as business. However, we have argued that private insurers be regulated much as public utilities are. In that way, excessive profits and earnings can be dealt with by forcing private carriers to justify their rates. Likewise, hospitals need to be mindful of their costs. Having said that, the number of hospitals in the nation that are in financial jeopardy greatly exceeds any number of health insurers in jeopardy. Real health reform requires a willingness to address insurance rates head on. Anything other than this will allow a replay of these actions noted above, over and over, across the nation . . . obi jo and jomaxx
Humana’s Profit Rises On Reserve Reversal – http://online.wsj.com/article/SB10001424052748703465204575207721894068094.html?KEYWORDS=Humana
Aetna Finds Flaw in Rate Request – http://online.wsj.com/article/SB10001424052748704227304575327372208943044.html?KEYWORDS=Aetna
Aetna Hit by Medicare Compliance Problems – http://online.wsj.com/article/SB10001424052702304222504575173953898953236.html?KEYWORDS=Aetna
Aetna’s Profit Rises on Investment Gains, Lower Claims – http://online.wsj.com/article/SB10001424052748704302304575213761385129460.html?KEYWORDS=Aetna
Humana Profit Rises 65% Despite Commercial Falloff – http://www.nytimes.com/2009/11/03/business/03humana.html
2009 CEO Compensation #399 Michael B McCallister – http://www.forbes.com/lists/2009/12/best-boss-09_Michael-B-McCallister_AG0Q.html
2010 CEO Compensation #66 Michael B McCallister – http://www.forbes.com/lists/2010/12/boss-10_Michael-B-McCallister_AG0Q.html
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