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2 insurers' profits plummet in 2011; High health care costs, overhead blamed

Profits tumbled sharply for two of the area's three health insurers last year, as medical expenses for members and operating expenses blew past revenues, according to new annual filings with state regulators by the three carriers.

HealthNow New York, the Buffalo-based parent of BlueCross BlueShield of Western New York, said net income for 2011 plummetted 92.5 percent to $3.94 million from $52.69 million in 2010. The company, which also owns BlueShield of Northeastern New York in Albany, is the largest of the three local plans.

Its net underwriting gain, or operating profit after medical and operating expenses are deducted from revenues, swung to a loss of $17.62 million from a $26.42 million profit a year ago. Total revenues were flat at $2.4 billion, almost all premiums.

"It's a very dynamic and ever-changing marketplace that we operate in, fiercely competitive, and there is really a number of constituents that we are balancing in our business," said Chief Financial Officer Steve Swift. He blamed the disappointing results on flat revenues and sharply higher-than-expected medical spending, particularly for medical care and more expensive services being used at higher rates in hospitals and other facilities.

Similarly, Williamsville-based Independent Health Association, the area's No. 2 carrier, reported that profits fell 61.4 percent to $28.24 million from $73.19 million in 2010.

That includes a profit of $28.85 million for its primary division, which administers its health maintenance organization plan, and a loss of $601,691 for its Independent Health Benefits Corp., which offers other plan options. Those compare with $70.16 million and $3.03 million, respectively, in 2010.

Total revenues rose 7 percent to $1.68 billion from $1.57 billion in 2010. The net underwriting gain fell 80 percent to $11.8 million from $59.3 million a year ago.

"Our steady, consistent financial performance over the past several years demonstrates that we use a disciplined and methodical approach to our budget process and premium rating," spokesman Frank Sava said.

The big exception was Excellus Health Plan, the Rochester-based parent of Univera Healthcare. Excellus -- the largest of the three companies in size but the smallest in the Buffalo area -- said earnings leaped five-fold to $223.29 million from $44.45 million in 2010. Revenues grew 9.5 percent to $5.67 billion -- almost all in premiums, as 85,000 new members joined statewide.

Its net underwriting gain soared 376 percent to $156.9 million from $33 million a year ago.

"Favorable pricing in our markets relative to our competitors contributed to our membership growth," said CEO David Klein, who is retiring this year.

In Western New York, Univera posted an underwriting gain of $31.6 million last year on $528.5 million in revenues -- about double what the local plans usually tout. Medical payments totaled $426.8 million, or 81 percent of revenues, while administrative costs were $42.6 million. The company did not break down its gain or profits last year.

All three insurers are not-for-profit companies, which means the "earnings" are actually "surplus" that is plowed back into their state-mandated reserves rather than paid out to shareholders. Those reserves are used to pay extraordinary claims in any given year and as a cushion to absorb any losses.

The results demonstrate the continued problem of spiraling health care costs, which outpaced the carriers' expectations last year, especially for hospitals and drugs. Additionally, health plans are investing heavily in technology and infrastructure as they ramp up in preparation for health care reforms, including the state's new health care exchange that is mandated by the federal Affordable Care Act.

As a result, officials expect continued struggles to balance revenues and expenses, ensuring they price their plans adequately but not excessively, while seeking to reduce medical spending, control operating costs and maintain appropriate capital reserves to pay extraordinary claims.

"Over the next two to three years, the company will be challenged to attain an operating surplus as we continue to invest in our infrastructure to support health reform and the transformation of our industry to a more consumer-driven, retail model," Sava said.

HealthNow said hospital and medical payouts totaled $1.61 billion, down 8.2 percent from a year ago, while other professional services tripled to $157.8 million. Emergency and out-of-area care more than tripled to $73.2 million, while drug costs rose 11.3 percent to $297.3 million. Medicare in particular lost $12.46 million -- the bulk of the company's underwriting loss.

General administrative expenses of $192.5 million rose 3.1 percent, including $85 million for salaries, $24.9 million for commissions, $21 million for auditing and consulting, and $18 million for outsourced services.

At IHA, hospital and medical payments rose 3.5 percent to $1.14 billion, while other professional services more than doubled to $9.19 million. Emergency and out-of-area care more than doubled to $24.9 million, while prescription drug costs jumped 21 percent to $25.8 million.

General and administrative costs rose 34 percent to $155.8 million, including $58.2 million in salaries, $6.5 million in commissions, $27.4 million in auditing and consulting, and $15.9 million for outsourced services.

Excellus' hospital and medical payments rose 7.7 percent to $3.71 billion, while other professional services fell 9 percent to $131 million. Emergency and out-of-area care more than doubled to $116.5 million, while prescription drug costs rose 4 percent to $759 million.

General and administrative costs rose 6 percent to $387.8 million, including $169.8 million in salaries, $99.6 million in commissions, $34 million in depreciation and $31.9 million for outsourced services.

email: jepstein@buffnews.com