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Health Insurers Battle Rising Costs
Health insurers continued to boost profits in the second quarter, even as they struggled to raise premiums in line with health care costs. Ratings' review of the financial performance of the 648 health insurers it tracks found that total net income rose by 27.5% during the first six months of 2007 to $8.8 billion, up from $6.9 billion the prior year.

Investment gains helped bridge the gap. They comprised 43.4% of industry profits, up from 35.7% the prior year, growing 55% to $3.8 billion through June 30, 2007 -- up from $2.5 billion a year earlier. By comparison, profits from insurer's core underwriting business increased just 9.1% to $5.8 billion through June 30, 2007, up from $5.3 billion the prior year.

(The study is based on the latest available statutory filings with the National Association of Insurance Commisssioners.)

Donna O'Rourke, senior financial analyst with Ratings, explains.

Q. Are rising health care costs the biggest risk for insurers?

A. On the one hand, insurers are dealing with rising health costs, and on the other hand -- as a result of competitive pressures and unwillingness by consumers to absorb more premium rate increases -- the ability to raise additional revenue to cover those costs.

But the industry also does business in an uncertain political environment. Revamping the financing of health care is a hot topic among the presidential hopefuls and many state governors.

The industry has also recently placed a lot of its efforts on the unstable Medicare line of business that is often the target of cost-cutting and heavy oversight by the federal government.

Q. But if profits are rising, should investors -- and consumers -- be worried?

A. The industry has been going strong for several years, really since 2003, when we came out of the last recession.

This continued profitability and strong market capitalization is reflected in the latest rating review; we upgraded 27 insurers and only downgraded four. This follows first-quarter ratings upgrades of 21 insurers and nine downgrades.

But health care costs continue to rise at a faster pace than revenue, because insurers struggle with raising premiums, and this is starting to affect their bottom line.

Q. Should we be concerned about a rise in investment gains? Are insurers making riskier investments?

A. Not necessarily. Normally, the industry makes some of its money by investing its liquid assets gained through prior years gains in various investments while making most of its profits from the actual business of health insurance.

An increase in investment income is not in itself a bad thing. But in an environment where margins on the core business are starting to narrow, it could become a concern in the future. What we see happening is an uptick in the percentage of profits coming from investments.

Health insurers, which are highly regulated, typically don't own high-risk investments. If they continue to hold low-risk investments, the income generated from them may not be sufficient to offset a decline in their business.

If insurers choose to raise the risk profile of their portfolios, they will need to make sure they have sufficient capital in place to pay out claims if their bets move in the wrong direction.

Q. Where are the largest areas of growth for health insurers?

A. The Medicare line of business, both the Medicare Advantage business and Medicare Part D, has had the biggest impact in terms of growth on the industry. Margins are very high and have been compensating for the highly competitive employer health insurance market. While this is still very small, we are also seeing growth in the individual private insurance market, and insurers continue to expand their offerings to self-funded employers.

Q. This competition should be good news for consumers, though, right?

A. That's right. Competition in these lines of business means more choice for consumers and downward pressure on premiums.

Ratings of Largest Health Insurers based on Asset Size
  cocode Company State Total Assets as of 6/30/07 Rating calendar
1 01053 Kaiser Foundation Health Plan CA 33,003,361,000 A- 30-Jun-07
2 70670 Health Care Svc Corp A Mut Leg Res IL 9,861,680,655 A+ 30-Jun-07
3 54291 Blue Cross Blue Shield of Michigan MI 5,404,145,776 A 30-Jun-07
4 54771 Highmark PA 5,201,782,687 B 30-Jun-07
5 98167 Blue Cross Blue Shield of Florida FL 4,399,508,746 B+ 30-Jun-07
6 01639 Blue Cross of California CA 4,351,015,000 A+ 30-Jun-07
7 01031 California Physicians Service CA 4,114,799,000 A 30-Jun-07
8 55093 Empire Heathchoice Assurance NY 3,324,959,768 A 30-Jun-07
9 55069 Horizon Healthcare NJ 2,870,146,522 A+ 30-Jun-07
10 28207 Anthem Ins Companies IN 2,511,867,719 B 30-Jun-07
11 54631 Blue Cross Blue Shield of NC NC 2,439,170,273 A- 30-Jun-07
12 55107 Excellus Health Plan NY 2,324,695,809 A+ 30-Jun-07
13 71835 Anthem Health Plans of Virginia VA 2,076,404,924 A- 30-Jun-07
14 01064 Pacificare of California CA 2,056,684,000 B+ 30-Jun-07
15 01048 Heath Net of California CA 2,043,743,640 B+ 30-Jun-07
16 38520 Blue Cross Blue Shield of SC SC 1,953,227,315 A- 30-Jun-07
17 53228 Blue Cross Blue Shield of MA MA 1,902,913,776 A 30-Jun-07
18 55433 Blue Cross Blue Shield of Alabama AL 1,880,826,618 A 30-Jun-07
19 54704 Indepdendence Blue Cross PA 1,822,559,284 B- 30-Jun-07
20 55026 Blue Cross Blue Shield of Minnesota MN 1,820,556,301 B+ 30-Jun-07
21 01353 Oxford Health Plans (NY) NY 1,799,949,565 A+ 30-Jun-07
22 55247 Health Insurance Plan of Greater NY NY 1,796,784,286 A 30-Jun-07
23 53007 Group Hosp & Medical Services DC 1,739,733,900 A+ 30-Jun-07
24 88848 Wellmark IA 1,717,485,161 B 30-Jun-07
25 10345 Community Ins Co OH 1,677,998,198 A- 30-Jun-07
Source: Ratings

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