Big Premium Increases Drive Higher Profits at Nation’s HMOs

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EVEN AS EMPLOYERS COMPLAIN about spiraling healthcare costs, the nation’s biggest health insurers are enjoying robust profits.

That brings up the interesting question about whether providers, including laboratories, can get better pricing during the next year, since HMOs are again profitable.

Bellwether HMOs To Watch

Good bellwethers for the HMO industry’s financial health are Aetna, Inc. and Kaiser Permanente. Both companies reported robust profits for the second quarter.

Clients of THE DARK REPORT are familiar with the financial woes that have dogged Aetna in recent years. However, those days seem to be ending. Aetna reported its second straight quarter with net operating earnings following a lengthy period of financial losses.

For second quarter, Aetna’s operating earnings were $91.3 million. This is a significant increase over its net operating loss of $44.3 million in Q2 2001. Most notable was Aetna’s reduction in its medical claims ratio. It was 84.1% in second quarter, compared to 91.3% in second quarter 2001.

Kaiser Permanente’s financial performance over the last two years has improved significantly from the sizeable losses it posted at the end of the 1990s. For the first six months of 2002, its net income was $458 million. This was an increase of 54% from the net income of $296 million it earned in the first six months of 2001.

A survey of other big national health insurance companies reveals a similar pattern of profitability. United Health Group reported record second quarter net earnings per share. Humana Inc. enjoyed a 19% increase in earnings, generated by higher revenues and big boosts in membership.

Experienced laboratorians know that the health insurance industry lives through cycles of mediocre financial performance which leads HMOs to aggressively raise premiums in subsequent years. As these premiums generate high revenues, it makes the insurers profitable again…at least until the next down cycle begins.

For laboratory administrators and pathologists hoping to gain better pricing and terms at managed care contracting time, HMOs’ improved profit margins are good news. It gives providers some extra leverage during negotiations at contract renewal time.

Reaction of Big Employers

What remains unknown is the reaction of big employers to the profits posted by health insurers. Although health premium increases in excess of 10% are again predicted for next year, certainly employers will not be happy about paying higher premiums at a time when health insurers are reporting ample profits.

However, if health insurers do succeed in pushing stiff premium increases on employers for 2003, then laboratories should have strong arguments in favor of improved pricing for lab testing services at contract renewal time.

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