Midway through the first-year experience of health insurance companies offering subsidized benefits to Americans under the Affordable Care Act, the industry is so far managing the costs of these newly insured customers.
This may be good for patients given the potential for prices to remain somewhat in check if competition remains strong. For investors, too, these are positive developments given the volatile insurance business that relies on risk pools and managing medical expenses so money is left over for the health plans to turn a profit and reward shareholders.
Major health insurance companies, which just reported their second-quarter earnings, were largely positive about their abilities to manage the medical expenses and costs of the 8 million Americans who signed up for private coverage under the law.
In the second quarter, both Cigna and WellPoint raised earnings expectations for the rest of the year. And when health plans weren't raising profit or revenue forecasts, they were announcing plans to move into more markets in 2015 to offer health plans on public exchanges as Aetna, UnitedHealth Group and Cigna did.
Cigna chief executive David Cordani indicated last week that those who signed up via public exchanges tend to be "a little bit more favorable or a little healthier population" than they anticipated.
"We've positioned this business to be manageable," Cordani told Wall Street analysts on the company's second-quarter earnings call.
But in Cigna's case, the company is effectively managing the costs of these new enrollees from public exchanges by including these newly insured Americans into the company's entire risk portfolio.
"We're not making money here and there is some more pressure," Cordani added. "It's manageable within the broad, diverse portfolio that makes up our company right now."
Humana, WellPoint, and UnitedHealth told analysts and investors on their recent second-quarter earnings calls that they are being cautious with the new enrollment though it appears that a surge of signups in March, the last month of the six-month open enrollment period, was younger which should improve the risk pool. Companies need large numbers of young and healthy customers paying premiums to counter the claims paid out for the older, sicker customers in the risk pool.
"The general characteristic of exchange applicants including average age, continue to track well versus our expectation," WellPoint chief executive officer Joe Swedish told analysts last week. "Product selection and benefit levels have also been consistent with expectation. We've been executing on our exchange rollout and have managed our exchange inventories in the second quarter through our planned levels.'
But while the late enrollees were younger, insurers were cautious on how they will impact costs because many haven't yet used the health care they have purchased. The surge of young people signed up in March, but their health benefits didn't kick in until a month or two later, or in some cases, midway through the second quarter.
"It is worth reminding investors that nearly two-thirds of our public exchange membership had April or May effective dates," Aetna CEO Mark Bertolini told analysts last week on his company's second-quarter earnings call. "As a result, our medical cost experience for this population is not yet mature enough to draw conclusions about its profitability. At this time we continue to project that our total individual business will be a modest headwind to 2014 operating earnings."
Health insurance stocks have been on a roll and the new business from the health law is being watched carefully. Investors will want to pay close attention in up-coming quarters as these newly insured customers start using their new benefits.
Bruce Japsen has no position in any stocks mentioned. 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.