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HMO Profits Remain Small As Health Costs Soar

SACRAMENTO BUSINESS JOURNAL

Frequent Rate Hikes Help Revenue Keep Up With Increasing Expenses

Though health care costs continue to rise, profits at the seven big health plans that serve the Sacramento region remain slim, new state figures show.

The companies together reported almost $86 billion in revenue from nearly 17 million Californians in 2011. But profit totaled just $3.2 billion.

The overall profit margin among HMOs that serve the Sacramento region is 3.7 percent, according to financial reports posted online by the California Department of Managed Health Care. Not included are preferred-provider plans and other health insurers regulated by the state Department of Insurance.

While employers complain of ever-rising premiums, health plans say those rates reflect the rising cost of care. Cost is being driven up in part by an aging population and by incentives that pay providers by the specific service, said Patrick Johnston, president and CEO at the California Association of Health Plans.

"Profits remain in the 3- to 5-percent range, consistently, so premiums are much more a function of the complicated overall cost of health care, including the underpayment of Medi-Cal and Medicare to doctors and hospitals that shift the cost to commercial payers."

By contrast, hospitals - which foresee tough times ahead under federal health reform - generally have reported higher margins.

Sutter Health had a profit margin of almost 7 percent last year; Dignity Health, 8.7 percent; and the UC Davis Health System, 9.3 percent.

But health plans, despite their relatively low profit margins, are targeted by consumer advocates who on May 18 delivered petitions signed by 800,000 California voters to qualify a rate regulation measure for the November ballot. The initiative needs 504,000 valid signatures to qualify. It must be certified by June 28 to appear on the ballot.

It's adamantly opposed by doctors, hospitals, health plans and other business groups because it caps rates without solving the basic problem of rising health care costs.

Jamie Court, president of Consumer Watchdog - the group backing the measure - says HMO profit margins are healthy and "a little deceptive" because plans keep far more money in reserves than the state requires.

The ballot measure would require health insurers to publicly disclose and justify proposed rate increases.

"There is a lot of fat in the system," Court said, adding that expenses like CEO compensation, bad-faith judgments, lobbying and political contributions shouldn't be passed on as a cost of doing business. "These are areas we think should be watched."

The market is beginning to change on its own.

In 2011, nonprofit Blue Shield of California became the first health plan in the nation to cap its total net income - at 2 percent of revenue - and return the difference to its customers and the community. The company paid out nearly $475 million last year.

Two other nonprofits - Kaiser Permanente and Western Health Advantage - channel proceeds back into the company or the communities they serve in other way. Four others are for-profit companies with shareholders.

Kaiser Permanente - an HMO and a health system - reported net income of $2 billion in 2011 and a profit margin of 4.1 percent on its HMO business in California last year.

That's better than some for-profit plans.

Aetna, with closer to 40,000 local members, had a profit margin last year of 5.6 percent, the highest of any plan locally. Company spokeswoman Anjie Coplin said Aetna's diverse products across large and small groups in the state - and lower use of services overall - contributed to the solid margin.

Western Health Advantage - the only Sacramento-based health plan - came in at the low end with a profit margin of 0.6 percent.

Owned by Dignity Health, the UC Davis Health System and NorthBay Healthcare in Fairfield, the nonprofit plan was established to channel business to it owners and pay them for their work.