Health Insurers Mull Costs, Future of Medicare

Perhaps obscured by the good news in recent earnings reports by publicly traded managed-care companies is a growing concern about medical-cost trends and an overreliance on Medicare business.

UnitedHealth(UNH Quote - Cramer on UNH - Stock Picks), Aetna(AET Quote - Cramer on AET - Stock Picks) and WellPoint(WLP Quote - Cramer on WLP - Stock Picks) all reported growing second-quarter profits. But only Aetna managed both strong gains in its health insurance base and cuts to its medical costs in an increasingly difficult industry environment. And with Medicare a likely target of future government cuts, curbing those costs while increasing paying customers is an utmost priority.

A new study of the nations' health insurers, released today by TheStreet.com Ratings, reinforces these concerns. Every quarter, TheStreet.com Ratings looks at the financial strength and industry trends of more than 500 individual insurance companies, both public and private. Our quantitative model assigns a rating from "A" to "E" based on each insurer's five-year financial performance, including an analysis of profitability, liquidity, stability and capitalization.

A review of 2006 annual financial statements shows the industry pulled in $11.2 billion in underwriting income, compared to $11.3 billion in 2005.

The slight decline in industry earnings contrasts sharply with the double-digit increases we saw in the early 2000s, suggesting that a change in the underwriting cycle has begun. Insurers received $232.56 per member each month in health-related revenues in 2006 compared to $216.08 in 2005 -- a 7.6% increase. However, medical expenses rose by an even greater amount, 8.5%, from $181.14 per member each month in 2005 to $196.52 in 2006. The competitive pressure on premiums the insurers are experiencing resulted in a decrease in overall profit margin from 4.4% to 3.8%.

The commercial line of business experienced a 1% decline in margin from 4.9% in 2005 to 3.8% in 2006, while the push into Medicare driven by the introduction of the Part D program drove margins upward from 4.9% in 2005 to 5.7% in 2006.

Years of industry consolidation, premium increases and stronger underwriting practices have left the industry in much better financial shape then it was in the late 1990s to early 2000s. This is reflected in TheStreet.com Ratings' assignment of more than 60% of health insurers in the "B" (good) or "A" (excellent) rating categories.

However, the industry is now facing a decline in margins on the commercial business, while potentially facing cutbacks in Medicare and an uncertain future regarding how the country finances health care. TheStreet.com Ratings will continue to monitor these trends for any effect on the financial strength of the nation's health insurers.

The financial strength rating of the 20 largest insurers (based on enrollment) are listed below:

Company	Group	Members (millions)	Financial Strength Rating
Health Care Service Corp (IL)*	HCSC Group	4.6	A+
Empire Healthchoice Assurance Inc (NY)	Wellpoint(WLP Quote - Cramer on WLP - Stock Picks)	2.7	A
Blue Cross Blue Shield of Michigan (MI)		2.6	A
Highmark Inc (PA)		2.4	B
Anthem Ins Companies (IN)	Wellpoint(WLP Quote - Cramer on WLP - Stock Picks)	1.9	B-
Excellus Health Plan Inc (NY) **		1.9	A+
United Healthcare Ins Co of NY	UnitedHealth Group(UNH Quote - Cramer on UNH - Stock Picks)	1.8	B-
Community Ins Co (OH)	Wellpoint(WLP Quote - Cramer on WLP - Stock Picks)	1.7	A-
Blue Cross Blue Shield of Florida		1.7	B+
Blue Cross Blue Shield of Alabama		1.7	A
Horizon Healthcare Services Inc (NJ)		1.7	A+
Group Health Incorporated (NY)		1.6	B+
Blue Cross Blue Shield of NC		1.4	A-
Wellmark Inc (IA)		1.2	B
Oxford Health Ins Inc (NY)	UnitedHealth Group(UNH Quote - Cramer on UNH - Stock Picks)	1.2	B+
Medical Mutual of Ohio		1.2	A
BlueCross BlueShield of Tennessee		1.1	A+
Anthem Health Plans of Virginia	Wellpoint(WLP Quote - Cramer on WLP - Stock Picks)	1.1	A-
Blue Cross Blue Shield of Arizona		1.1	A+
Regence Blue Cross Blue Shield Oregon	Regence Group	1.1	B
Source: Ratings by TheStreet.com Ratings. Data from 2006 NAIC Health statement company filings. * Does business as Blue Cross Blue Shield of Oklahoma, Blue Cross Blue Shield of Illinois, Blue Cross Blue Shield of Texas and Blue Cross Blue Shield of New Mexico. ** Does business of Blue Cross Blue Shield of Central New York

TheStreet.Com Ratings provides an easy way for a policyholder or provider to monitor the financial strength of any insurance company with TheStreet.Com Ratings Screener.