Consolidation and the Transformation of Competition in Health Insurance

James C. Robinson


Health Affairs. 2004;23(6) 

In This Article

Prices and Profits

Table 3 presents indicators of the financial performance of the largest U.S. health insurers during 2000 2003. This includes year-over-year rates of growth in medical costs, premium rates, operating profit margins, and share prices, plus the average yearly ratio of medical costs to premium revenues for insured products (medical cost ratio). Data are presented for WellPoint and Anthem separately, as their merger was announced only in 2004, as well as for United, Aetna, and CIGNA.

The first four rows of Table 3 report the rate of inflation in medical claims payments made by each of the insurers, documenting on a plan-specific basis the resurgence of growth in unit prices and use of services after the hiatus of the 1990s.[9] Growth in claims costs adversely affects health plans only to the extent that insurers cannot raise premiums at an equivalent or faster rate. As indicated in the next four rows of Table 3 , however, health plans during these years were able to raise prices consistently above the rate of growth in costs, with premium yields 1.5 to 2.0 percentage points above cost trends since 2000. The ability of premiums to outpace claims is further illustrated in the subsequent rows, which present the ratio of medical costs to premium revenues for insured products.[10] Between 2000 and 2003 the medical cost ratios declined by more than four percentage points for Anthem and United and by nine percentage points for Aetna, while holding constant for WellPoint (with the lowest baseline ratio) and CIGNA.

Table 3 next presents the operating earnings margin (earnings before interest and taxes) over the four-year period.[11] Given its position as an intermediary between purchasers and providers, the insurance industry traditionally reports thin profits as a percentage of revenues. It was remarkable that during this period of high medical cost inflation, large health plans were able to increase their operating margins. With the exception of Anthem, large plans grew their margins by at least 50 percent (WellPoint and United) and in two cases by more than 100 percent (Aetna and CIGNA, starting from lower baselines).

The numbers of particular interest to investors are the returns on equity, the percentage rate of return for each dollar invested in health insurance firms. As indicated in the next section of Table 3 , returns on equity were excellent over the recent four-year period for the leading firms in the sector with the exception of Aetna, which crashed and almost burned as a result of excessive acquisition-driven growth.[12] Returns on invested capital were approximately 20 percent each year for WellPoint, CIGNA, and United, with United spiking to almost 40 percent in 2003, and were comfortably in the teens for Anthem. Even Aetna recovered after its debacle, with return on equity rising into the double digits in 2003 after negative returns two years earlier. Returns for mid-size health plans (not shown in Table 3 ) were equally attractive, with the 2003 sector high for Oxford (58.7 percent) and an average of 19.9 percent for all publicly traded health plans.[13] While return-on-equity measures are not available for nonprofit health plans, the non-profit BCBS plans enjoyed financial results equal to or better than those of their for-profit counterparts. Between 2002 and 2003 the non-profit Blues increased operating earnings by 111 percent and net income by 87 percent, compared with the increase of 42 percent in operating earnings and 36 percent in net income on the part of their for-profit Blues counterparts.[14]

The final rows of Table 3 highlight the investor perspective on the health insurance industry.[15] Aetna and CIGNA endured setbacks and loss of market share (mostly to Blue Cross plans) and a consequent volatility in share prices during these four years. WellPoint, Anthem, and United, however, consistently received double-digit rates of appreciation in share prices. By way of comparison, the Standard and Poor's (S&P) 500 index of equity prices for the broader stock market declined by 10.1 percent in 2000, 13.0 percent in 2001, and 23.4 percent in 2002, followed by a rise of 26.4 percent in 2003.