Yesterday's news was filled with "worries" about United Health Group as its stock was hammered. But what can consumers do in understanding the "poor performance" of second largest managed care company in membership and the largest in revenue and why should we? (http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20080422-000352-0813) In short because UNH profits from insureds are up: More premiums, less outlay of costs for medical services (as reflected in a lower medical cost ratio). And while UNH consumers pay more for less coverage, fewer consumers are choosing UNH plans (as they should for all those free market economy types) but, UNH is making money and gaining membership in its new Medicare/Medicaid patients but beware, the company wants to make more off those people too which means updated lists of less coverage. And UNH is making money off non-insurance businesses, marketing administrative services to companies who used to actually try to get insurance product choices for their employees. Meanwhile, UNH has lost bundles of money because of economic conditions, (lower interest rates), lawsuits (in spite of clawbacks, reclaiming some of money from backdating options for executives), acquisitions of other health services companies and predictably all the corporate waste that consumers cannot control. So why focus on the "cost" of insuring people including whining about the bad flu season? Because it's easy and because distracting people from the real root of missed profits: corporate misconduct and mismanagement doesn't allow UNH to cover itself by merely charging more to consumers.
Why did UNH stock drop? Most basically because its earnings per share that were expected to be $.79 per share came in as $.78 per share...a miss. For consumers of health insurance product, however, this miss is not meaningful until we figure out how United Health Group intends to punish its customers for its own failures.
In a report in the StarTribune.com, Chen May Yee reports that UNH dropped its full year forecast (not good, meaning profits down for the year which explains stock price drop)[http://www.startribune.com/business/18000839.html?page=2&c=y] because of
REASONS FOR EARNING DROP IN UNH cited as : "unusually high flu costs, reduced investment income as a result of the Federal Reserve's rate cuts and a loss of commercial membership"
Reasons for earnings drop according to Stephen Hemsley, president and chief executive:
losses are "due in part to broader economic challenges and in part to our own performance...." (see StarTribune cite above).
...in our language, that means that people who paid for health insurance got sick (they are an insurance company?), interest rates are lower (we all see that in our savings accounts) and fewer people are choosing UNH commercial health insurance plans...(you think the cost of such plans for less coverage might influence that particular reduction?).
So what will UNH do? Nothing good for consumers because remember, we're the piggy bank and the more money taken in from consumers or on their behalf by employers or the government and the less paid out for pesky things like insurance coverage, the more money UNH makes, right? No, because UNH is not losing money from its consumers, it's losing money from mismanagement, lawsuits, and lower interest rates earned on its investments. How can I reach these conclusions?
Our consumer story starts with coverage of William W. McGuire, former chief executive of United Health Group who in December 2007 decided to payback around $418 million dollars for backdated stock options (search Mr. McGuire to read various articles on his escapades, including an article in the New York Times on December 7, 2007, by Eric Dash at http://www.nytimes.com/2007/12/07/business/07options.html). (Backdated options give options to buy stock at a price that represents a day when share prices were low so that profit from such stocks when stocks rise is greater.) The lawsuit against the company was brought by shareholders and pension plans, investors in UNH. Stephen Hemsley (the guy bemoaning the flu season) gave back about $240 million in back-dated options. Oh yeah, the company also settled with IRS for $55 million. Did crime pay? Well, don't feel too bad for Mr. McGuire, he's got a $7 million fine and won't be a director of a public company for ten years BUT he's keeping stock options valued at more than $800 million. So, while executives were lining their own pockets, what was UNH doing?
in February 2008, UNH reported that its net earnings were up 12% over 2006 (http://biz.yahoo.com/e/080221/unh10-k.html). In that same report, the increased consolidated revenues of around 5% were attributed to: Rate increases on premium-based and fee-based services and growth in the total number of individuals served by Health Care Services. Wait a second, didn't we read in our REASONS FOR EARNINGS DROP that there was loss of commercial membership? Well yes, but according to the Yahoo! Finance copy of the company's annual report, MEDICARE PART D programs were launched in January 2006 and that the membership and profits from this business were "partially offset by a slight decrease in the number of individuals served by [our] commercial risk-based products." Medicare Part D is a cash cow, it sounds like, which is not much news.
So what about the non-government program profits from health insurance, the commercial markets? Premium revenues up in 2006 27% over 2005. Why? Premium costs to consumers were raised 8%, but fewer policies were sold which reduced the profits from charging more to existing customers.
Oh yes, and that pesky Medical Care ratio? (Medical care ratio lower more profit to business because it is medical cost as a percentage of premium). Well, that decreased...mirroring more profit for less medical services coverage, that number went from 81.2% in 2006 to 80.6% in 2007. (See also http://conoutofconsumer.blogspot.com/search?q=medical+cost+ratio). Note, the same report includes a statement that medical costs increased which includes for us non-accountant types statements indicating that the lower profit margin for insurance companies for Medicare services (since legislatures and the feds dictate how little can be covered more than in the private sector.)
In summary, it seems that UNH is suffering in its core insurance company business in spite of huge premium increases because of loss of consumer customers. However, with the addition of expanded Medicare/Medicaid programs, UNH has actually increased membership and profits (though these profits are smaller than the profits gained from regular Joe consumers). OptumHealth, described as a company providing "personalized health advocacy and engagement," increased its revenues by 13%: attributed to increased membership and...RATE INCREASES.
Ingenix: offering administrative assistance by way of "data managment...software...publications...consulting and actuarial services...business rocess outsourcing..." they made money: up 36% in 2007 from 2006.
Prescription Solutions: Up 224% in 2007 over 2006: "primarily driven by providing prescription drug benefit services to Ovations Medicare Advantage and stand-alone Part D members."
So what does United Health Group plan to do? You know, trim benefits and increase premiums...maybe get rid of that pesky coverage of actual illness to further reduce its medical cost ratio? In the private sector commercial products, no doubt. UNH will, based on my conclusions do several things: First, they're promising to "reposition" their investments, which is outside the consumer sphere, we do not control interest rates. Second, they will expand the cash cow that is Medicare/Medicaid but will increase those margins by continuing to tweak what they cover...anticipate updated lists of coverage for medications, I think. Third, they will expand their administrative services including more non-insurance products such as Health Savings Plans, I think, this is where the money is. Fourth, they will leave their commercial insurance in its slow shift to high deductible less coverage plans and continue increasing premiums for whatever they do cover without doing anything substantial until the next president is in office and they can gage how best to capitalize on new health services laws and policies. Fifth, they will put off buying other businesses for a few quarters, I think. Sixth, they will not manage executive pay, awards of stock options, corporate waste, corporate fraud but based on increased revenues from government programs and non-insurance product administrative paper-pushing businesses will increase employer dollars spent on administering these idiotic products such as health savings accounts and will therefore eventually make money...their stock will go up, and Mr. McGuire will be able to exercise his stock options for a hefty profit...we'll have come full circle.
