Insurance Information

Vice president and senior credit officer at New York-based Moody's Investors Services Inc., Stephen Zaharuk, says that a number of things happening in the health care space are unsettling. As an example he points to the Obama administration's call for national health reform. In addition to this he cites cuts in federal funding of the Medicare Advantage program and also the enrollment losses as the result of increasing layoffs.

Managing senior financial analyst with A.M. Best Co. Inc. which is based in Oldwick, N.J., Sally Rosen, says that earnings were not as good in 2008 as they were in 2007. She adds however, that there are other issues to consider besides investment returns. In fact she says, each of the companies seems to have its own independent issues.

She uses as an example the fact that during the winter of 2007 and up into 2008, in several areas of the country the flu season was worse than it had been in several years. She says that although there does not seem to be an increase in medical cost trends as a result of this, there is an increase in utilization. She adds that the industry is seeing an increase in large dollar claims and severity of claims.
For example, UnitedHealth Group Inc., which is based in Minnetonka, Minnesota, due to unusually high flu costs and reduced investment income, reduced its full-year 2008 outlook by 10%. For the complete year, in 2007 UnitedHealth's net income fell to $2.97 billion from $4.65 billion, a drop of 36%.

WellPoint Inc., which is based in Indianapolis, reported for 2008, net income of $2.5 billion vs. a 2007 income of $3.3 billion, after changing its financial forecast several times last year.

A Best Inc. financial analyst, Wayne Kaminski, says that they had an issue with systems migration.

Ms. Rosen said that after several acquisitions in 2007 and 2008, WellPoint had several legacy claims systems that needed to be merged.
He notes that other insurers had to deal with issues with product design and pricing that were mostly Medicare-related. Ms. Rosen says that the manner in which policies were priced and designed allowed for several companies to be selected against.

As an example he notes Coventry Health Care Inc. which is based in Bethesda, Maryland which because of Medicare Advantage issues had to restate its 2008 forecast twice last year.

Ms. Rosen points out that during the first quarter of 2008, Coventry Health Care Inc. realized a much longer claims turnaround on the Medicare Advantage fee-for-service product as compared with their traditional business. This she says, resulted in their 2007 reserve turning out to be much lower than expected. In turn, underreserving affected mostly plans that were designed to cover large groups enrolled as a part of employer-sponsored retiree benefits plans.

A similar thing she says happened to Louisville, Kentucky - based Humana Inc. which had a pricing issue with one of their Part D plans. Not only had they underpriced the product, but they also ended up experiencing adverse selection since the plan attracted more sick seniors. This occurred because it was designed to protect them from going over their out-of-pocket maximum spending on prescription drugs.
This was corrected in premium charges for 2009, but had to be dealt with during all of 2008, according to Ms. Rosen.