Health insurance brings dividends

Stockholders are one group that can't complain about managed-care companies.



While double-digit increases in the cost of health insurance have gotten most of the attention in recent years, investors in managed-care companies have been enjoying triple-digit returns.



The price increases - combined with consolidation, increased efficiency and better management - have produced record profits for managed-care companies.



"These companies have generated a huge return on capital," said Ivan Feinseth, director of research for Matrix USA, an institutional research and brokerage firm in New York.



The result has been stunning gains in the stocks of companies that sell health insurance and manage health plans.



The performance can be seen in the stocks of the three publicly traded managed-care companies with the largest market share in Wisconsin:



• UnitedHealth Group Inc., the parent of UnitedHealthcare, is up nearly fivefold since Aug. 1, 2000, increasing from $10.75 a share to close at $52.24 on Friday. In the past year, the stock is up about 63%.



• WellPoint Inc., the parent of Blue Cross Blue Shield of Wisconsin, is up roughly fourfold since it became a public company in October 2001, increasing from $18 a share to close at $72.74 Friday. In the past year, the stock is up about 80%.



• Humana Inc. is up roughly sixfold since Aug. 1, 2000, increasing from $7.25 a share to Friday's close of $45.65. In the past year, the stock is up more than 140%.



These companies aren't the exceptions.



In the past five years, the Morgan Stanley Healthcare Payors Index, a composite of 12 managed-care companies, is up more than fourfold. In that time, the Standard & Poor's 500, a broad measure of the stock market, is down about 16%.



"Health care in general is a great business," said William Custer, director of the Center for Health Services Research at Georgia State University in Atlanta. "People are making a lot of money at it."



The question is whether the run will continue. And here, industry analysts are split.



Wall Street analysts, by a large majority, continue to recommend WellPoint and UnitedHealth, the two largest health insurers. And some analysts remain bullish on the sector. They see a promising market in enrolling Medicare beneficiaries in health maintenance organizations.



They also see the largest companies continuing to benefit from consolidation.



But others question whether the industry overall can continue to post impressive gains. For one thing, enrollment in commercial health plans is stagnant, as rising costs force more employers to drop health insurance as a benefit.



"Enrollment growth is what is going to be difficult for these companies on the commercial side," said Jackie Doeler, who oversees the health care portfolio for the State of Wisconsin Investment Board.



No one knows whether that will lead to price competition, Doeler said. And the outlook for the industry will depend partly on future premiums.



Managed care companies have been able to raise prices in recent years, she noted. "And therefore they have done quite well."



The rise in health care premiums is slowing. But the same goes for health care costs. The patents for several costly drugs have expired, for instance, and the same will happen to several others in the next few years.



Consolidation continues

Consolidation also has contributed to the strong performance of managed-care stocks in recent years, Doeler said.



Administering health plans is a business, not unlike financial services, in which size can bring economies of scale.



Investments in technology, for instance, have helped managed-care companies lower administrative costs and increase profits.



"The people who are left have gotten pretty good at this," said Custer, who also is a professor of risk management and insurance at Georgia State.



The industry's consolidation shows no signs of slowing.



Last month, UnitedHealth, based in a Minneapolis suburb, struck a deal to buy PacifiCare Health Systems Inc. for $8.1 billion in cash and stock.



In recent years, UnitedHealth has bought Oxford Health Plans Inc., Definity Health Corp. and Golden Rule. In Wisconsin, it bought Touchpoint Health Plan, a health maintenance organization, for $40 million last year.



WellPoint, based in Indianapolis, was created when Anthem Inc. and WellPoint Health Networks Inc. merged late last year. In Wisconsin, Anthem bought Cobalt Corp., the parent of Blue Cross Blue Shield of Wisconsin, in September 2003.



Humana, based in Louisville, Ky., has moved more gingerly. But its large presence in Wisconsin, where it employs about 3,300 people, stems partly from its acquisition of Emphesys Financial Group Inc. in 1995.



Consolidation has been the trend since managed care first began to take hold. And it's easy to forget that the personal computer has been around longer than many managed care companies.



Managed care didn't become widespread until the early 1990s. And the companies that entered the business were learning as they went along, experimenting with the type of plans they offer, the types of contracts they struck with hospitals and doctors, and the way they managed costs.



The results were often mixed. In its early days, managed care could be good way to lose money - and many of the companies did.



Nearly 60% of health maintenance organizations lost money in 1997, according to an overview done in 1999 by the Henry J. Kaiser Family Foundation, which does research on health policy.



That started to change in the late 1990s.



"We've seen a maturing of the industry, in a sense," said Custer, of Georgia State.



With age comes growth

The nascent market for Medicare HMOs, now called "Medicare Advantage," also could benefit managed care companies.



Many companies abandoned the business when rising health care costs outpaced what they were paid by the federal government. But the legislation that created a drug benefit for Medicare increased the fees paid to the companies. That's renewed interest in the market - one expected to grow as the population ages.



Managed-care companies also will administer the new Medicare prescription drug plans. That, too, could be a source of future profits - although the market could be chaotic in its early days.



Humana has a strong presence in Medicare HMOs. And the potential profit from Medicare HMOs partly accounts for the company's stock more than doubling in the past year.



Some analysts, though, question whether the market will be quite as profitable as expected.



"You don't know what the government is going to do with pricing, going forward," said Doeler, the portfolio manager for the state investment board.



Managed-care companies also see potential in so-called consumer directed health plans, which typically combine a high deductible with a type of savings account.



The plans have been a boost to the market for small businesses and individual health insurance. That's one of the strengths of Assurant Inc., with health insurance operations based in Milwaukee. Assurant Health writes individual and short-term health insurance and group health insurance to small-employer groups, primarily of two to 40 employees.



Assurant sells a variety of financial services and products. But its stock, too, has risen. Since being spun off by Fortis, a Belgian financial services company, in February of last year, Assurant stock has increased from $22 a share to $38.11 at Friday's close.



Consumer-directed plans have been touted as a way to slow the rise in health care costs. But Custer and others see the plans as little more than cost-shifting.



"All they are is less insurance," Custer said.



Health care costs continue to outpace inflation. And the impact of rising health care costs could be the biggest unknown in the long-term prospects of managed-care companies.



There is no shortage of employers, hospitals, doctors, economists and managed-care executives who contend the health care system is broken. And Custer said that at some point the system will have to be restructured.



That day, he added, is "not necessarily that far away."



Wall Street clearly doesn't see that risk. But Custer, a university professor and researcher, looks at the insurance industry's role in the health care system.



Analysts such as Feinseth, the research director of Matrix USA, look at return on capital and other financial yardsticks. And there the numbers speak for themselves.



"These companies," Feinseth said, "have been able to earn very good returns on capital."



Given the companies' performance over the past five years, so, too, have their stockholders.