Wellness a medical cost? Answer key to HMO profit

By Susan Heavey and Lewis Krauskopf – Analysis

WASHINGTON/NEW YORK (BestGrowthStock) – Does calling a nurse hotline count as medical care?

Whether health insurers’ costs for providing such services count as medical care or administrative work is at the heart of critical debate that could affect the industry’s bottom line as the Obama administration works to implement key parts of the recently passed U.S. health reform law.

Under new rules that take effect next year, health insurance companies are required to spend at least 85 cents of every premium dollar on actual medical care rather than salaries, overhead and other administrative expenses. Smaller plans for individual customers or small groups get somewhat more leeway and must spend at least 80 cents on the dollar.

Such spending rates, known as medical loss ratios, or MLRs, are closely watched by Wall Street as one sign of potential profitability. They are also a key part of determining the price insurers set for their monthly rates.

U.S. health regulators must first define what qualifies as medical spending versus other costs, with various groups due to submit comments by May 14, keeping investors on edge and managed care stocks under pressure.

The concern is that the new rules “could put the squeeze on managed care,” said Capital Alpha Partners analyst Kim Monk.

Since the start of April the S&P Managed Health Care index of large insurers has fallen more than 11 percent against a 2 percent decline for the S&P 500, as concerns over the MLR regulations consumed investors. The insurers’ stock declines came despite a well-received first-quarter that easily topped Wall Street expectations.

Companies such as Aetna Inc and WellPoint are pushing for broad MLR categories that they say give them the flexibility to provide better care that can also help reduce unnecessary and costly services.

But consumer advocacy groups and Democratic lawmakers are worried that could allow insurers to count administrative costs as medical expenses, ultimately spending less on patient claims. They want to see tightly defined categories that spell out exactly what services count as care.

Both sides are pressing their case as a key group, the National Association of Insurance Commissioners (NAIC), prepares to offer the administration its recommendation on how to calculate MLR by June 1.

Narrow definitions could cause “unintended consequences” and “destabilize the marketplace,” Aetna’s head actuary Michael Fedyna told NAIC this month. Insurers may have to eliminate beneficial programs, raise rates or eliminate plans, he said.

In a recent letter to the Department of Health and Human Services, Senate Commerce Committee Chairman John Rockefeller warned he was “extremely concerned that the health insurance industry is mounting an all-out effort to weaken this important consumer protection.”

HHS officials will weigh NAIC’s report in drafting the final rules. Companies must start reporting their annual accounting of their costs September 23. The 85 percent and 80 percent medical loss ratio requirements take effect on January 1.


The definitions are so critical that the once-obscure NAIC has come into sharp focus on Wall Street.

At the heart of the issue is whether certain activities like nurse hotlines, health information technology and wellness programs will be considered medical costs. If so, it could make it easier for insurers to meet spending thresholds.

“There’s a gray zone between just paying bills or paying high salaries to executives and the services they provide,” said Stuart Altman, a health policy professor at Brandeis University.

On one hand, such programs can help improve patient care by preventing dangerous drug mix-ups through electronic medical records or ensuring patients take needed medications. But they arguably can also be used to control costs by reducing the amount of care patients use or steering them to cheaper drugs.

For example, a nurse hotline that “provides some good advice — maybe it’s the middle of the night and you can’t get to the doctor” — would reasonably be considered medical care, said Kathleen Stoll, health policy director for the consumer group Families USA. But one where nurses screen patients and approve certain services, she said, “that’s a problem.”

Also in focus is how regulators decide what counts as part of the premium, such as various taxes or broker commissions. If the way those issues are handled reduces companies’ premium revenue, it could also ease their ability to meet MLR targets.

Investors and consumers alike are also watching whether definitions will be the same across the board, or vary state-by-state, which companies say would be more of a burden.

A broader national, or regional, measure “allows you to move things around, so if you’re way below the MLRs in one market, you might be above in another and the two offset themselves,” Stifel Nicolaus analyst Thomas Carroll said.


Until now, if companies spent less of their premium revenue on care, it signaled to investors a potential boost in profit margins. But starting in January, if insurers spend less than the mandated amounts on care, consumers get a rebate.

While HHS must still issue final rules, it is clear consumers, not bottom lines, are the new focus.

“We can’t get rid of the nagging feeling that the world has changed for the managed care industry,” Oppenheimer & Co analyst Carl McDonald said in a research note. “It feels like this administration is going to do everything in their power to keep the for-profit health plans from earning the kind of margins they have enjoyed historically.”

With the MLR requirements pressuring profit margins, McDonald expects earnings growth of 3 percent in 2011 for large, diversified health insurers. Large insurers are trading on average at just 8.6 times 2011 earnings estimates, according to Thomson Reuters data.

Brandeis University’s Altman said despite the changes, the shift could help health insurance refocus their business.

“If the insurance companies are going to do more than just pay bills, they need to get back to doing serious managed care, he said. That “means helping patients navigate the healthcare system — not just to save money but also to improve the quality of care.

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(Reporting by Susan Heavey in Washington and Lewis Krauskopf in New York, editing by Dave Zimmerman)

Wellness a medical cost? Answer key to HMO profit