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Nonprofit Blue Cross plans pressure US HMO profit

Nonprofit Blue Cross Blue Shield health insurers are reaping windfall profits these days, allowing them to price their services very aggressively -- and this could create headaches for some U.S. HMOs, analysts said.
/ Source: Reuters

Nonprofit Blue Cross Blue Shield health insurers are reaping windfall profits these days, allowing them to price their services very aggressively -- and this could create headaches for some U.S. HMOs, analysts said.

Competition is heating up among all health plans, and because so-called Blue plans insure one in three Americans, they have a huge influence on health-care premiums. Two industry analysts this week warned that publicly traded HMOs should be worried about the record profits at their nonprofit rivals.

Earnings at nonprofit Blues grew by 116 percent in 2003, more than three times the rate of commercial HMOs, according to Matthew Borsch, an analyst at Goldman Sachs.

"The Blues' profits will hurt the (for-profit) HMO sector," Borsch told investors on a conference call this week. "I believe the (not-for-profit Blues) are pricing fairly aggressively" and willing to accept lower margins, he said.

State officials have taken note of the Blues' financial health, and may pressure them to limit profits -- for example, by cutting premium hikes -- in order to retain their nonprofit, tax-preferred status.

State efforts to stem premium increases among nonprofits could lead to more competitive pricing for business among all HMOs, including publicly traded ones like Humana Inc. and Coventry Health Care Inc. , analysts said.

Officials at Humana and First Health Group last month warned that pricing pressures will crimp profits going forward. Borsch said those most affected by Blue Cross pricing are Humana and Coventry.

PICKUP IN STATE INTEREST

Nearly one-third of Blue Cross plans are pricing their premiums below health cost trends or giving back excess profits from premiums, according to research by Ellen Wilson, analyst at Sanford Bernstein.

Pennsylvania, Rhode Island, North Carolina, Maryland, New Jersey, Florida and Michigan are among the states scrutinizing excess profits, measured by reserve levels, at the Blues, according to analysts.

States are becoming more aggressive after Maryland took its Blue Cross CareFirst to task over what it called excessive executive compensation, according to Dawn Touzin, an attorney with the consumer group Community Catalyst.

The state eventually blocked a conversion to for-profit status for the health plan and a proposed acquisition of the plan by publicly traded WellPoint Health Networks .

"I think that states are looking and saying, 'Shouldn't they be behaving differently?'" than for-profit plans, Touzin said. "There is definitely a pickup in state interest."

As profits among all health insurers soar, premiums are still rising by double-digit rates. Mounting prescription, hospital and doctor costs drove up health care premiums by 13.9 percent in 2003.

"Once their surplus (at nonprofit Blues) starts looking real big, they have a hard time justifying big rate increases," said Gary Claxton, a health-care marketplace expert at the nonprofit Kaiser Family Foundation. "States have a certain amount of leverage."