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Health insurers expect hit from reform rule

February 9, 2011

A new health care overhaul mandate that once stirred fear among insurers is proving to be challenging — but not too challenging — as it makes its debut in 2011.

Major health insurers say a provision that requires them to spend a certain percentage of the premiums they collect on care-related costs will eat into earnings this year. But Aetna Inc. and Cigna Corp. both say their profits could still grow in 2011, and Aetna also plans to start paying a significantly higher dividend to shareholders this year.

Indianapolis-based WellPoint Inc., the largest health insurer based on enrollment, expects to take a $300 million hit this year just from the so-called medical-loss ratio provision, and it forecast a lower profit than 2010.

But Citi analyst Carl McDonald predicts the insurer will soon announce its own shareholder dividend. A spokeswoman for WellPoint, which runs Blue Cross Blue Shield plans in several states, declined to comment on that and said the company will discuss its capital deployment plans at its annual investor meeting Feb. 23.

The medical-loss ratio, or MLR, scared insurance investors and industry representatives at first because it essentially regulates company profits.

"It sounded worse than it is when you actually look at the financial impact," said Morningstar analyst Matthew Coffina, who termed the provision a "mild negative" for the industry.

Starting this year, insurers have to spend at least 80 percent of the premiums they collect on care-related costs for individual and small-group insurance and 85 percent for large-group coverage, or offer customer rebates. The goal behind the law is to make sure a good portion of the premiums an insurer collects goes toward care and not profits or big salaries.

The industry trade group America's Health Insurance Plans warned last fall, while the nuts and bolts of the rule were being debated, that it could reduce competition and lead to coverage disruptions. But regulators worked to avoid that with final rules that allow states to apply for waivers if regulators conclude insurers may leave a market because they won't be able to meet the minimums.

Insurers, meanwhile, adjusted to comply with the ratios. Many are slashing commissions for individual and small-group insurance brokers. They also are figuring out how to operate more efficiently or invest money back into their business to meet the required minimums and make their product more attractive.

That might mean running more nurse call centers to manage the cost of care for heart failure patients, said Dan Mendelson, CEO of the research firm Avalere Health.

"I feel like the rules of the road changed, and now everybody is figuring out how to drive on the left side as opposed to the right side," he said.

To be sure, the industry will feel an impact from the new rule. Aetna could pay rebates ranging from $80 million to $100 million next year based on its 2011 MLRs, according to a BernsteinResearch estimate.

The MLR impact largely depends on an insurer's business mix. Analysts say the 80 percent requirement for individual and small-group coverage will be much more challenging for insurers than the large-group requirement.

Wells Fargo Securities analyst Peter Costa said some insurers may still eventually leave unprofitable markets, especially if they get hit from multiple angles.

Insurers also face other costs from the health care overhaul and growing scrutiny of their individual rates from regulators. On top of that, low interest rates will pressure them this year. Health care use, which was lower than expected last year, is expected to return to normal levels in 2011, which drives up costs.

"There will, in my opinion, be a point where companies won't be willing to stick with it and continue to take losses," Costa said.

But BMO Capital analyst Dave Shove said insurers for the most part will adjust to the MLR requirement.

"It doesn't take the growth away . it changes the base off of which you grow," he said.

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