Health Insurers Hedge Their Bets

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Erosion of Corporate Support

The MCO industry's chief trade association, America's Health Insurance Plans, with support from many parts of Corporate America, has strongly advocated retaining a system based on employer coverage. Even though employer-sponsored insurance has been gradually eroding, MCOs note that big corporations still provide insurance for 60% of Americans. Greater emphasis on a more fragmented individual market would require MCOs to undertake substantial restructuring and raise operating and medical costs, as people with particular health profiles would gravitate toward certain kinds of policies.

MCOs also see long-term growth opportunities in government programs, as states increasingly turn to managed care to help control Medicaid costs, S&P's Seligman notes. This trend could give MCOs an advantage if public-sector initiatives drive reforms. Aetna and UnitedHealth Group (UNH), for example, have acquired Medicaid companies. Aetna acquired Schaller Anderson, a leading provider of Medicaid managed-care services, a year ago, for $535 million. UnitedHealth's AmeriChoice business unit bought Unison, a leading provider of state Medicaid services, in June 2008. While potential health-care reforms were not the key drivers for the acquisitions, the companies are now better prepared for changes if or when reforms come.

MCOs aren't sure how the demand for government products will evolve, however. In recent years, they have collected substantial profits by participating in the Medicare prescription-drug benefit, introduced in 2006, and in Medicare Advantage (MA), which pays MCOs to administer medical programs for Medicare enrollees. MA's relatively new private fee-for-service (PFFS) option has been particularly attractive for MCOs. It entitles MA enrollees to select any provider. Medicare pays MCOs a premium for administering PFFS programs, which are designed to entice more Medicare members to use managed care.

Mature Market

Growth for Medicare Part D, also known as the Prescription Drug Plan (PDP), is slowing as the market matures, and even the most stalwart providers believe the MA program's opportunities—at least in its current form—are peaking. Humana (HUM), for example, saw its revenues double in recent years, largely as a result of its aggressive pursuit of PDP and MA PFFS programs. In June, however, CEO told investors that Humana sees Medicare PFFS as transitory, with a shift expected to a new kind of MA program over the next two-and-a-half years. "Medicare Advantage will be a growth vehicle over the long term because of demographics, and MCOs will make money in it, but it won't be the private fee-for-service model," says Seligman.

Even if MA and PDP growth slows, the industry generally views the mid-to-long-term prospects for Medicare and Medicaid managed care as better than traditional employer markets. Humana and other MCOs believe that they can collaborate with the government to help provide what , chief of medical affairs for UnitedHealth, refers to as "structured coverage for vulnerable populations through more public/private partnerships." UnitedHealth's AmeriChoice business, for example, saw revenues climb 25% in the second quarter from the year-ago period, to $1.4 billion. Its Medicaid membership rose 10% during the same period, and even more if the acquisitions of Unison and another health care network, Sierra, are included.

Some new state initiatives may indicate the future. UnitedHealth didn't detail how its recent Medicaid growth came about. Its AmeriChoice business, however, is aggressively working with state reformers; it is involved in Healthy Indiana, for example, the first state effort to provide a benefit package based on a high-deductible plan and health savings account for Medicaid recipients.

Diller is a reporter for Standard & Poor's Global Editorial Operations .