From Obamacare to Fitness Apps, 3 Profit-Boosting Ideas

Cigna, Aetna and Wellpoint raised their profit forecasts recently. The major insurers cost-cutting and profit-boosting efforts include deals with technology companies, hospitals and oncologists. But the agreements are raising eyebrows and may not spell good news for long-term investors.

Jun 7, 2014 at 3:03PM

Major insurers Cigna Corporation (NYSE:CI), Aetna (NYSE:AET) and WellPoint (NYSE:ANTM) are spinning their wheels quickly, trying to find new ways to increase profitability as they handle the various changes resulting from Obamacare.

Cigna was the latest in the parade of health insurance companies to raise its profit outlook recently, related in part to expected new business under Obamacare. Cigna now expects income between $7.05 and $7.35 a share for 2014. That's an increase of 20 cents per share from previous guidance.

Positive financial projections were also issued in January and February from Aetna, Humana and UnitedHealth Group. WellPoint raised its 2014 earnings outlook from greater than $8.00 per share to greater than $8.20 per share at its March investor conference.

The major insurers wholesale bid to raise profits is interesting, since a key provision in the Affordable Care Act limits those very profits. All insurers face a minimum medical loss ratio under Obamacare. That's insurance-speak for being required to spend 80 percent of their premiums on actually treating patients. Still, a number of states are petitioning for a waiver of that limitation. Seven states have already had it granted, including Maine, New Hampshire, Kentucky, Nevada, Iowa, Georgia and Wisconsin.

In the meantime, insurers are doing their best to find new ways to reduce costs. Here's what's in the cards.

Will an app a day keep the doctor away?
Cigna and Samsung (NASDAQOTH:SSNLF) recently launched a health guidance app for the Samsung Galaxy S5 mobile phone. The app allows users to set goals in the areas of exercise, nutrition, sleep, stress and weight. Users either enter data manually into their smartphone, or it can be collected via sensors in the Galaxy Gear or Gear Fit.

If downloading an app on a mobile phone could cause individuals to lead healthier lives, insurer margins would certainly improve. But the jury is still out on that. There are said to be over 40,000 health and fitness apps available. Unfortunately, evidence they actually work to promote health behaviors in users is lacking. In fact, according to one report, 26% of people who download health apps use them only once.

Aetna goes "all in" with accountable care
Aetna is projecting that 20 to 25 percent of their medical costs will run through some form of value-based network contract in 2014. In addition, they are committed to increasing that participation percentage to 45 percent by the end of 2017, according to Morningstar.

Accountable Care Organizations have greatly proliferated recently, with insurers WellPoint and Aetna leading the charge. Both insurers believe that juice from ACOs will be worth the squeeze, but as Becker's Hospital Review pointed out recently, ACOs are the "least agreed-upon concept in health care." In the same report, Gary Thomas, head of Accountable Care Solutions at Aetna, said he's seen "nuances in how organizations pursue accountable care programs."

It's still too soon to point out how much money ACOs will save. Value-based care is a great idea, but right now we're living in both worlds, with pay-for-volume competing with pay-for-quality. Currently, Medicare continues to reimburse hospitals primairly on a fee-for-service model. Until that changes, it's going to be difficult to motivate hospitals to reduce utilization and incentivize physicians to spend more time on preventive care.

WellPoint ties oncologist bonus to standardized cancer treatment
Traditionally, insurers have hesitated to use reimbursement strategies to promote standardized cancer treatment. But WellPoint broke with tradition recently. This summer the company is rolling out a plan to pay oncologists $350 per month for each cancer patient treated in "compliance" with WellPoint's recommended treatment regimen.

WellPoint estimates a savings of 3% to 4% of cancer treatment costs, which total around $5.4 billion a year, according to a Wall Street Journal Report. WellPoint is one of my favorite health insurers as an investor, but I'm a former cancer patient and the move makes me uneasy. It puts a lot of tension between personalized medicine and standardized care and borders on putting what is best for the patients in opposition to what is best for the physician. As Taussig Cancer Institute Chairman and well-known oncologist Brian J. Bolwell said recently, "We generally don't like to practice by insurance company. We practice by patient."

While some physicians believe WellPoint's clinical guidelines are reasonable, others note that some routinely used chemotherapy drugs were not included in the lists, according to Health IT Analytics. In addition, the discovery of how unique genetic fingerprints affect the aggressiveness of certain cancers has led to a much more experimental approach to cancer regimens for many oncologists, and if those oncologists continue to pursue those approaches, there won't be additional bonus checks in the mail.

WellPoint asserts their new cancer program will trim waste from the health care system, but the ultimate results could be mixed -- after all, medicine isn't always a one-size-fits-all deal. That's a gamble cancer patients may not want to take, and it could well erode WellPoint's expected payoff.

Changes in the insurance market are going to ripple across every sector of the U.S. health care delivery system under Obamacare. Choices are narrowing with health insurance, but we still have them, and insurance company profits depend heavily on members staying in their networks. Insurers could find some nasty pushback coming from members.

Insurers too tightly focused on boosting profits short-term may find themselves long-term losers. Investors in health insurance need to keep their eyes on the Obamacare opportunity. This game could change in the blink of an eye.

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Cheryl Swanson owns shares of WellPoint. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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