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Health insurers expect hit from reform rule

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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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  • Ahhhh--poor babies!
    They are making alot of money as it is-------maybe they should trying going up and beyond to help their insured.

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  1. Now if he'd just stay there...

  2. Daniel - what about the many US citizens who do NOT follow what the Bible teaches? The Hindus, Jews, Muslims and others who are all American citizens entitled to all rights as Americans?? This issue has NOTHING to do with "What the Bible says..." Keep all Churches separate from State! Pence's ongoing idiocy continues to make Indiana look like a backwards, homophobic state in the eyes of our nation. Can't we move on to bigger issues - like educating our kids?

  3. 1. IBJ should link to the referenced report. We are in the age of electronic media...not sharing information is lazy. Here is a link http://www.in.gov/gov/files/Blue_Ribbon_Panel_Report_July_9_2014.pdf 2. The article should provide more clarity about the make-up of this panel. The commenters are making this item out to be partisan, it does not appear the panel is partisan. Here is a list of the panel which appears to be balanced with different SME to add different perspectives http://www.in.gov/activecalendar/EventList.aspx?view=EventDetails&eventidn=138116?formation_id=189603 3. It suggests a by-pass, I do not see where this report suggests another "loop". 4. Henry, based on your kneejerk reaction, we would be better off if you moved to another state unless your post was meant as sarcasm in which case I say Well Done. 5. The article and report actually indicates need to improve rail and port infrastructure in direct contradiction to Shayla commentary. Specifically, recommendation is to consider passenger rail projects... 6. People have a voice with their elected officials. These are suggestions and do not represent "crony capitalism", etc. The report needs to be analyzed and the legislature can decide on priorities and spending. Don't like it, then vote in a new legislature but quit artificially creating issues where there are none! People need to sift through the politics and provide constructive criticism to the process rather than making uninformed comments in a public forum based on misinformation. IBJ should work harder to correct the record in these forums when blatant errors or misrepresentations are made.

  4. Joe ... Marriage is defined in the Bible ... it is mentioned in the Bible often. Marriage is not mentioned once in the US or Indiana Constitution ...

  5. Daniel - Educate me please: what does the Bible have to do with laws? If the government wasn't in the business of marriage to begin with, then it wouldn't have to "define" marriage at all. Marriage could be left as a personal, religious, or otherwise unregulated action, with no ties to taxes, legal status, etc. Then people could marry whomever they want, and all this silliness would go away. Remember to vote Libertarian in November.

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