Sept. 18--The two major health insurers headquartered in Greater Hartford told analysts Thursday that the money they make handling government insurance programs is the biggest reason their profits have been strong this year.
Aetna Chief Financial Officer Shawn Guertin and Cigna CEO David Cordani both answered questions from Morgan Stanley stock analyst Andy Schenker at a health care conference the investment bank hosted in New York.
Aetna has announced plans to buy health insurer Humana, and Anthem intends to purchase Cigna.
"It's been a great year," Guertin said. "Our government business, both Medicare and Medicaid, has performed exceptionally well from both growth and [profit] margin."
Medicare, the taxpayer-paid insurance that covers those 65 and older as well as some disabled people, has been partially privatized with Medicare Advantage plans.
Most states hire private insurers to do managed-care coordination and cost control for their Medicaid programs. Medicaid, the government insurance for the poor, has 74 percent of its patients in managed-care programs, although Tennessee has all of its Medicaid clients in such a program.
Guertin noted that Medicare and Medicaid have been particularly important because they're both profitable and growing. Medicare is growing because of the baby boomers' aging; Medicaid, because eligibility was expanded as part of Obamacare.
Medicare Advantage was the No. 1 reason Aetna wanted to buy Humana, he said. "Obviously, that's the real pearl," he said.
"From our standpoint we think Medicare Advantage is one of the most attractive places to be," he said, because of the baby boomer bulge and the ability to maintain profit margins in the 4 percent to 6 percent range.
Now, he said, Aetna offers Medicare Advantage in markets that cover 45 percent of all Medicare patients. After the merger is approved -- even assuming divestitures -- it will have offerings for 90 percent of Medicare patients.
Guertin added, "The second thing I love is the commercial business." He said that when he says that, "Everybody looks at me cockeyed."
That's because Humana's profits from insurance sold to employers have not been as high as they are at most companies.
"I always like finding things I can make better," Guertin said. "We have a large, very competitive commercial network. ... We can take that business, literally put it onto our infrastructure, the efficiencies that exist in our commercial business, and go at it pretty quickly."
Both Guertin and Cordani projected that the large majority of the savings their companies project as a result of their proposed merger will come from cost-cutting in sales and administration. Neither gave specifics about where the cuts might come.
Cordani said that while the bulk of the savings of an Anthem-Cigna merger will come from cost cuts in the first two years of integration, the long-term benefit is in giving Cigna access to Anthem customers to sell dental, disability, behavioral or other specialty insurance lines, as well as the ability to expand ancillary services, such as prescription benefit management.
"Anybody can go in and cut expenses and deliver a number," Cordani said. "Smart synergies come from understanding how you want to create value and getting the leverage off of that."
Schenker asked Cordani how Cigna manages to control medical inflation among its patient population better than any other company.
Cordani said Cigna has been the best by this metric -- or tied for best -- for three years. He said Cigna has figured out how to motivate individual patients to make changes in their lives that make them healthier: If they're overweight, losing weight. If they have high cholesterol, controlling it. If they're pregnant, going to the doctor consistently, which, he said, leads to fewer premature births.
"When you do that, you're able to generate a better quality outcome that creates a better cost outcome," he said.
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