Cigna's Health-Insurance Business Melting Down, Out of Sight
Cigna's third-quarter net income may have fallen by more than half last week, but its health-plan operations weren't largely to blame -- in fact, the profitability of its health-insurance business actually rose compared to a year earlier. That fact, though, shouldn't disguise a slow-motion meltdown in its managed-care business.
For starters, Cigna is something of an oddball among major health-insurance providers. Between 70 and 80 percent of its health-plan membership derives from lower-profit, self-insured policies Cigna manages for employers and large organizations, an extremely high percentage compared to other major insurers. Its operating income is also much more dependent on returns generated by its huge investment portfolio than is the case at other major health-insurance companies.
Cigna is also still exposed to some significant non-health-related insurance products that can seriously skew its earnings -- and which tend to grab the attention of investors, often to the exclusion of long-term problems in the healthcare business, which accounts for roughly the vast majority of the company's revenues. Updated to include Monday stock movements: In the third quarter, for instance, losses associated with variable-annuity death benefits tanked its earnings and drove down its stock price by roughly 20 percent, although Cigna shares had made up most of that drop by Monday afternoon after the company reassured markets that it doesn't need to raise new capital.
In other words, Cigna investors are easily distracted from the company's bigger issues. Like other insurers, Cigna's biggest fundamental problem is that it's bleeding health-plan members, especially in the high-margin, fully-insured plans it offers primarily to large employers. The company doesn't report membership trends in its earnings release, but did so in its quarterly 10-Q filing with the SEC. As it turns out, the company's HMO business lost 222,000 members compared to a year earlier, or almost 40 percent of that particular offering.
Overall, Cigna's health-plan membership rose during the quarter, although thanks only to its recent acquisition of Great-West Healthcare, another provider of -- you guessed it -- self-insured health plans. Absent Great-West, Cigna's membership was essentially flat in the third quarter, and the company said it expects things to get worse over the next year or so. In 2008, for instance, Cigna expects membership (not including Great-West) to fall by roughly one percent, or about 100,000 members. Next year, however, the company is forecasting another two percent membership decline, this time including Great-West -- what amounts to a loss of another 220,000 members or so.
Here's how Cigna president David Cordani described it in the company's conference call:
[W]e are anticipating a decline in the lower end of the segment that is more concentrated in guarantee costs and experienced-rated products reflecting the impacts of maintaining our pricing disciplines. The result changes the mix of our portfolio which reduces our 2009 earnings growth potential due to our increased concentration in lower risk and therefore lower margin service business.Translated from Cigna's irritating corporate-speak, Cordani is saying that the company's fully-insured business -- a mix of HMO and related insurance that it insists on describing as "guaranteed cost" plans and "experience-rated" policies whose premiums adjust depending on the medical costs an individual racks up -- will suffer largely because the cost to employers (Cigna's "pricing discipline," also known as higher premiums) is starting to price Cigna out of those markets. That, in turn, further heightens Cigna's reliance on its less profitable plan-administration business.
For whatever reason, Cigna is reluctant to report its medical-loss ratio -- the amount it pays out in medical benefits as a percentage of premium income -- in either its earnings release or its 10-Q. Company officials did discuss cost issues in the conference call, but only in a cursory fashion. For instance, they boasted that the ration for Cigna's traditional health plans improved slightly to 83.8 percent in the third quarter, up from 84.8 percent in the first half, thanks both to higher premiums and "strengthened underwriting" that largely amounts to being pickier about offering insurance only to healthier folks.
Cigna now plans a cost-cutting drive aimed at saving $50 million in expenses, but doesn't plan layoffs.
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