A.M. Best Special Report: Moderating Costs Favorably Impact Health Insurers' Earnings

Business Wire, Jan 17, 2005

OLDWICK, N.J. -- Lower-than-anticipated increases in health-care costs contributed very favorably to third-quarter earnings reported by most of the managed-care companies featured in a special report released by A.M. Best Co.

On average, net income increased approximately 40%, driven by significant improvement in Cigna Corp.'s earnings; Aetna Inc.'s progress subsequent to the completion of its financial and strategic turnaround; and overall continued strong earnings performance by UnitedHealth Group Inc., as well as WellPoint Health Systems Inc. and Anthem Inc.

For the second year in a row, health-care costs have moderated. Among the top 15 public managed-care companies, health-care expenses increased by 6.4% from September 30, 2003, to September 30, 2004, when adjusted for the acquisitions of Mid Atlantic Medical Services Inc. (MAMSI) and Oxford Health Plans Inc. by UnitedHealth Group Inc. in 2004. Comparably, health-care expenses increased 7.8% between September 30, 2002, and September 30, 2003.

Although health-care costs appear to be stabilizing, premium yields are decelerating. Premium yields still are increasing, but by less than the underlying cost trends. The effect of several years of significant benefit buy-downs as a means of manipulating premium increases most likely has been fully exhausted. What remains is that net medical trends should be higher in the absence of a meaningful decline in underlying cost trends, thus causing a negative spread.

While companies' health-care cost percentage increases have remained in the low teens during the past two years, overall health-care costs continue to outpace U.S. economic growth. The Federal Reserve released its latest nationwide economic survey highlighting that economic growth in the third quarter of 2004 was 7.2%, and noted it to be the strongest in two decades.

BestWeek subscribers can download a PDF copy of all full special reports at no additional cost or a combination of the PDF copies plus all related spreadsheet files of the report data at no additional cost from our Web site at http://www.bestweek.com.

Nonsubscribers can download a PDF copy of the full special report (12 pages) for $50 or a combination of the PDF copy plus the spreadsheet file of the report data for $100 from our Web site at http://www.bestweek.com. Call customer service for more information, (908) 439-2200, ext. 5742.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.