AP
The coronavirus pandemic treated the health insurance sector well in the first half of 2020. Many Blue Cross and Blue Shield plans were no exception.
A Modern Healthcare examination of not-for-profit Blues companies revealed that a number of them saw a big jump in income as they benefited from the widespread deferral of expensive elective procedures, which resulted in fewer claims to pay.
Health Care Service Corp. raked in $2.6 billion in net income in the first half of the year, up 14.5% over the same six months in 2019, while Pittsburgh-based Highmark and subsidiaries nearly doubled net income to $538.3 million.
Even though many were profitable, more than a dozen companies reported lower net income and weaker margins compared with the same period in 2019. Large Blues plans in California, Florida and North Carolina were among those that performed relatively worse.
Many plans were saddled with higher administrative expenses and some were hit with lower investment income, putting pressure on the bottom line, analysts said. Some expenses were driven by the companies’ attempts to give back excess premium revenue by reducing member costs, beefing up benefits or propping up physician practices.
Moreover, the Blues’ business models, which focus heavily on selling employer-based coverage, made them more vulnerable to the economic downturn, which saw job and health coverage losses spike, experts said.
“To the extent that you see margins compressed more so by the Blues, it’s probably got a lot to do with the fact that the economy has hit small and medium-sized businesses so hard relative to some of the larger ones, that it’s really taken a toll on the Blues’ ability to earn margin,” said Nate Akers, a director at consultancy Guidehouse whose clients include some of the largest Blues plans.
The variation in financial performance during the pandemic diverges from that of the national, publicly traded health insurers, all of which grew profits in the first half of the year as patients put off routine care and hospitals postponed non-urgent services, primarily during the second quarter. For-profit Blues affiliate Anthem, for instance, grew net income 41% to $3.8 billion in the first half.
Modern Healthcare analyzed the results of dozens of independent Blues companies using financial statements obtained from the National Association of Insurance Commissioners and data from the California Department of Managed Health Care. The analysis excluded subsidiaries unrelated to health insurance and filings that lacked detailed information on premiums, claims or expenses. It also excluded publicly traded insurers Anthem, which operates in 14 states, and Puerto Rico-based Triple-S Management Corp. For some companies, quarterly reports were available for only some of their operations.
The Blues’ performance varied widely. Across the companies for which quarterly reports were publicly available, 18 reported lower net income and 17 reported worse margins compared with the first half of 2019. Another 14 companies reported better profits.
Collectively, Blues plans in the analysis grew revenue 4% to $114.6 billion in the first six months of 2020 compared with the same period in 2019. They reported combined net income of $7.9 billion, an uptick of 1.3%, or $103.1 million.
Most of the insurers spent less on healthcare benefits during the pandemic. Spending on benefits, including prescription drugs, decreased 1.2%, or $1.1 billion, across the plans to $90.9 billion in the first half. However, nearly all the companies had higher general administrative expenses: Combined, those costs soared 44% to $12.9 billion.
Several companies and the Blue Cross and Blue Shield Association attributed the jump in administrative costs to an Affordable Care Act tax on health insurers that is in effect this year. That nondeductible tax, which must be recorded as an administrative expense in full at the start of the year, was suspended for 2019 and is permanently repealed beginning next year. It’s expected to bring in $15.5 billion in 2020.
Deep Banerjee, managing director at S&P Global, said insurers could also be using excess income to speed up incurring non-medical expenses: “They might have thought they want to spend $100 million over the next 12 months or 24 months, but seeing how good the first half of the year has been, they take advantage and make that spending now instead of having to wait,” he said.
Blue Cross and Blue Shield of Kansas City, the sole insurer in the analysis that posted a loss in the first half of the year, explained that its $7.4 million loss was driven by one-time investments committed to before the pandemic to improve information technology, insource Medicare Advantage and return to the ACA markets.
For some of the Blues, the benefit of lower healthcare utilization outweighed any extra costs. “The companies we’ve seen so far are looking strong in terms of operating earnings,” said Brad Ellis, a senior director at Fitch Ratings. He said that lower healthcare utilization was “the single strongest driving factor” in the first half of the year.
Highmark Health Chief Financial Officer Saurabh Tripathi said the insurance company’s bottom line was buoyed by lower claims, plus higher enrollment in Medicare Advantage and commercial plans, which led to more premium income. Enrollment gains drove revenue up 13.6% to $6.9 billion. Its profit margin was 7.9%, compared with 4.5% in the first half of 2019.
“We are seeing a lift because the claims are lower, but as the deferred care comes back—and we expect it to come back either in the second half of this year or beginning of next year—we will see the claims volume go up,” Tripathi said. “Some of these earnings will be eroded.”
Likewise, Health Care Service Corp. said its medical claims dropped sharply due to stay-at-home orders. Its revenue rose 8.5% to $21.3 billion, and its profit margin grew to 12.2% from 11.5%. The decline in medical claims during the coronavirus crisis offset an increase in benefits and administrative expenses driven by growth in Medicaid and group membership, the company said.
Blue Cross and Blue Shield of Minnesota, Blue Cross and Blue Shield of Tennessee, Harrisburg, Pa.-based plans Capital Blue Cross and Excellus Blue Cross and Blue Shield also attributed their higher bottom lines to temporary care deferrals. All said they are already seeing claims volumes return to normal.
But even with the benefit of lower utilization, a number of other Blues insurers reported weaker earnings, which they said reflected efforts to reduce the cost of their health plans through lower premiums or member cost-sharing.
Gurpreet Singh, U.S. health services sector leader at PwC, also noted that after record profitability in 2018 and 2019, most Blues plans had very little or no price increases for 2020, which was “a very deliberate move to moderate profits.”
That was the case at Florida Blue, which reported net income of $637.2 million in the first six months of the year, down about 6%. Its profit margin was 6.5% compared with 7.2% a year ago.
A company spokeswoman said the insurer reduced its individual and fully insured group premiums for 2020 knowing that it would bring in less income as a result. Florida Blue also expanded its wellness program rewards to help members facing financial hardship amid the pandemic. That, plus the health insurer tax, drove administrative costs up 39%.
Sally Rosen, senior director at credit rating agency A.M. Best, said some of the actions that companies took to help members and providers—whether it be premium relief, cost-sharing waivers for services like telehealth, or other community investments made during the pandemic—could drive up administrative or claims expenses, depending on the initiative.
Blue Cross NC said the health insurer tax coupled with rate decreases in the individual market for 2020 reduced its net income 22% to $364.5 million in the first half of the year, even though it spent less on medical care. Blue Cross NC’s administrative expenses jumped almost 50% because of a $160 million charge for the health insurer tax, a spokeswoman said.
Meanwhile, Blue Cross and Blue Shield of Michigan’s bottom line slipped 2.6% to $586.2 million. The insurer blamed the health insurer tax as well as expenditures made to support its members during the pandemic and incentive payments advanced to providers to support telehealth services. While spending on medical care fell almost 8%, administrative costs rose about 35%.
Fitch’s Ellis said lower investment income stemming from market volatility in the second quarter could also be dragging down companies’ bottom lines. While public companies tend to invest in bonds, Blues plans that operate in one state tend to invest in a higher proportion of common equities, making them more susceptible to market swings, he said.
Blue Shield of California, for example, reported a 27% decrease in net income in the first half of 2020 to $627.8 million, which it attributed to lower investment and other income. The insurer’s profit margin fell to 5.9% from 8%.
Correction: This article originally said Capital Blue Cross is based in New York. The insurer is based in Harrisburg, Pa.
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