Insurers Getting Rich By Not Paying for Care

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If I had stayed in the insurance industry, my net worth would have spiked between 4 p.m. Wednesday and 4 p.m. Thursday last week -- and I wouldn't even have had to show up for work.

I'm betting that just about every executive of a for-profit health insurance company, whose total compensation ultimately depends on the value of their stock options, woke up on Good Friday considerably wealthier than they were 24 hours earlier. Why? Because of the spectacular profits that one of those companies reported Thursday morning.

Among those suddenly wealthier executives, by the way, are the corporate medical directors who decide whether or not patients will get coverage for treatments their doctors believe might save their lives.

UnitedHealth Group, the biggest health insurer in terms of revenue and market value, earned so much more during the first three months of this year than Wall Street expected that investors rushed to buy shares of every one of the seven health insurers that comprise the managed care sector. In my view, it would be more accurate to call it the managed care cartel.

UnitedHealth is always the first of the big seven to announce earnings every quarter, so investors consider it a bellwether. If UnitedHealth exceeds Wall Street's expectations, as it has been doing consistently, investors assume that the other six will do likewise. Sure enough, all seven -- Aetna, CIGNA, Coventry, Health Net, Humana, UnitedHealth and WellPoint -- saw their stock prices close Thursday afternoon at or near 52-week highs.

UnitedHealth's shares shot up more than 8 percent during the day. Increases of that magnitude are so rare that I could almost hear the champagne corks popping in the Minnetonka, Minnesota office of UnitedHealth's CEO, Stephen J. Hemsley.

Wall Street analysts had worried that health insurers would have such a hard time complying with the provisions of the year-old health care reform law that their profit margins would decline. Those concerns were put to rest when UnitedHealth reported that its operating margins were "stable" at 8.7 percent in the quarter. The company's stellar performance should also put to rest -- forever -- the myth that "ObamaCare" is "bleeding insurers dry," as industry apologist Sally Pipes contended in a Feb. 24 commentary in Forbes.

Noting that UnitedHealth's 13 percent increase in profits prompted the company to raise its full-year earnings forecast, the Minneapolis Star Tribune opined, "Life under new health care reform laws may not be so rough after all."

Indeed. Consider these numbers: UnitedHealth's profit during the first three months of this year increased to $1.35 billion from $1.19 billion a year ago. When you do the math to determine the company's earnings per share, the result is nothing short of jaw-dropping. On that basis, UnitedHealth's profit jumped from $1.03 to $1.22 per share. Wall Street analysts had been expecting the company to earn just 89 cents a share. When you beat Wall Street's expectations by 33 cents a share, you have accomplished something that most CEOs can only dream about.

UnitedHealth's CEO at Top of Forbes 2011 Executive Pay List

Speaking of CEOs, Stephen Hemsley in particular made out like a bandit Thursday. Already at the very pinnacle of Forbes 2011 "Executive Pay List" (you read that right, his total compensation of $101.96 million last year made him the highest paid corporate executive in the United States of America), Hemsley saw his net worth skyrocket last week.

Of that $101.96 million Hemsley "earned" last year, $98.55 million came from stock gains, mostly from exercising options. And that doesn't even count the value of stock options he hasn't yet cashed in. According to published reports about the company's Securities and Exchange Commission (SEC) filings, the total value of the options Hemsley had not exercised by the end of last year totaled almost $745 million. Considering the fact that the price of UnitedHealth's stock has increased by more than $20 per share in just the last nine months, you can be pretty certain that Hemsley is now sitting on a stash of options worth well over $1 billion. That doesn't count the shares of UnitedHealth stock Hemsley owns outright, the value of which was estimated to be $111.4 million at the end of 2010 and which, of course, is much higher now.

As you can imagine, Hemsley and other UnitedHealth executives were peppered with questions during the company's conference call with Wall Street analysts last Thursday. They wanted to know how UnitedHealth had pulled off such a stunning accomplishment.

As it turned out, they pulled it off by paying far fewer medical claims than anyone had expected. That in and of itself is not new. Last year was one of the industry's most profitable years because, the big insurers insisted, their policyholders had not needed to go the doctor or check into the hospital as much as they had in the past. Consequently the insurers did not have to pay as many claims. The reason they gave was that the flu season last year was much less severe than predicted.

Insurers Mum on What's Really Making Their Profits Skyrocket

Well, it turns out that dog won't hunt anymore. UnitedHealth executives admitted during the call with analysts Thursday morning that "the incidence of influenza was substantially higher this quarter than last year." So, even though more people had to be treated for the flu during the first three months of this year than UnitedHealth had expected, the company still managed to spend less on medical claims during the quarter than investors had expected.

Not being able to attribute the unexpected decrease in medical spending to a mild flu season this time, Hemsley and his colleagues said it was because of the unexpected decrease in stormy weather.

I'm not making this up. They blamed the company's good fortune on "the effect of severe consistent winter weather conditions across significant portions of the country."

Veteran analyst Christine Arnold of Cowen and Company apparently wasn't buying it, so she pressed for more "clarity" during the call.

"Excluding places where you saw winter storms," she asked, "was utilization (of health services) up?"

Earlier in the call, the executives seemed to be suggesting that the number of inpatient hospital "bed days" was down considerably because of bad weather.

"So, excluding storms," she probed, "were bed days up?"

UnitedHealth's chief financial officer, Dan Schumacher, finally had to 'fess up.

"Bed days excluding storms were flat to slightly down depending on the geography," he replied.

In other words, it wasn't the stormy weather after all. Unfortunately, Arnold did not press further ("OK. That's helpful. Thanks," she said) and no one asked the logical follow-up question: "Well, then, what was it?"

Insurers Pinch Policy Holders for Higher Premiums and Out-of-Pocket Costs

Contrary to what insurance company bigwigs try to make us believe, it is not snow, sleet and freezing rain or mild flu seasons that enables these companies to blow Wall Street's estimates out of the water. What they will not admit is that their companies are making record profits by pushing more and more of us into benefit plans that require us to pay a whole lot more out of our own pockets before they will pay anything for our medical care.

And I'm betting that if the insurers had to disclose their rates of claim denials and the number of procedures their medical directors are refusing to pay for, we would see that those numbers are increasing, and maybe substantially. Medical directors know they play a key role in meeting Wall Street's expectations, and they're rewarded with raises, bonuses and, yes, stock options, if management is pleased with their job performance. The less money these companies pay out for care, the more is left over to reward shareholders and a bunch of corporate executives.

This is why, folks, that "utilization" is down. Growing numbers of people who have insurance, who are paying hard-earned money every month for coverage that is increasingly inadequate as well as expensive, simply can't scrape up enough cash to go to the doctor or hospital or, in many cases, even pick up their prescriptions.

That is a trend that the insurers are determined to continue. And while we are being forced to go without necessary care and empty our pockets to pay our premiums, insurance company billionaire Stephen Hemsley and his cohorts are stuffing their pockets -- with our money.