Health insurance companies are supposed to make money, but Health is hemorrhaging money at an alarming rate. The company lost $1 billion in the first quarter of this year alone and has now lost $4 billion over the past four years. That raises questions not only about its future but also about its increasingly close relationship with Cigna, which has become a major investor in Health in addition to purchasing parts of its operations, including the very popular pharmacy benefit manager unit known as Express Scripts, last year in a $54 billion deal.
The drop in Health’s share price
Health’s stock price started strong in its first year as a public company but has been on a downward slide since. That doesn’t necessarily mean shareholders have lost faith in Health, but those who don’t are moving their money elsewhere. To restore investor confidence, Health will need to produce concrete results—which could include announcing new partnerships or selling more subscriptions. Investors are currently betting that Health can pull out of its spiral before that money runs out completely.
Questions over why the company didn’t disclose the bad news earlier
Last week, health insurer Health Insurance Inc. (HIIQ) announced that its second-quarter profits were $23 million lower than expected because it didn’t meet targets in several areas of its business. But some analysts believe that Health may have withheld details about those missed targets for a significant period. There should be a debate over why there wasn’t disclosure in May, said G. Craig Maleady, head of health care research at William Blair & Co., which owns Health shares. If there had been disclosure then, maybe we wouldn’t be here today. The timing isn’t as important as what happened, said John Nadel, an analyst at RBC Capital Markets; he believes that Health has made a mistake by holding off on announcing disappointing news until July.
Questions over the company’s close ties with its parent company
In a presentation during a recent investor day, they explained that they have fundamentally aligned goals, yet some analysts have raised questions about their close relationship. Skeptics question whether there are potential conflicts of interest between UnitedHealth Group, which is run by CEO Stephen Hemsley, and Cigna. The company has a say in how Health operates but those decisions could also impact Hemsley’s compensation if he remains with Cigna after his tenure at UnitedHealth Group ends. Last year, around 44 percent of UnitedHealth Group’s total revenues came from its relationship with Cigna.
Questions over what this means for Cigna
Following Health’s statement, Cigna shares fell by more than 2 percent. It was a reaction that suggests investors might be concerned about what these financial struggles mean for their relationship with Health. And, if you look at recent history, they have good reason to be worried: In 2016, Cigna reported that it lost $1 billion in its ACA business because of rising costs associated with high-risk enrollees. While Cigna has been diversifying its portfolio by acquiring other insurers—most recently Aetna—it remains dependent on revenues from Obamacare plans. For example, in 2015, just two years ago, Obamacare accounted for nearly 20 percent of revenues generated by Cigna and its subsidiaries.
Health care spending may fall in 2019
A new government report says health care spending is likely to decline next year, marking a sharp departure from a period in which costs have been steadily rising. The Centers for Medicare & Medicaid Services said Wednesday that its forecast projects $3.5 trillion will be spent on health care in 2019, or 5 percent less than expected. That’s largely due to lower projections for prices paid by hospitals, doctors, and drugmakers after several years of increases. CMS projects Medicare costs will rise 1.6 percent next year compared with 2 percent in 2018 and 3.4 percent in 2017. Costs for employer-sponsored coverage are projected to increase 4 percent in 2019, down from 4.8 percent growth last year.
It looks like health care spending will fall next year
This year, health care spending will likely be 3.6 percent higher than last year, or about 2 trillion dollars. But next year’s budget calls for a slowdown in medical inflation. If we continue at that pace for another few years, what does that mean? For example, if medical costs grow 1 percentage point slower each year, we would reduce national health expenditures by $78 billion annually by 2020.
