Boston’s Mayor is outraged at Humana’s decision to raise premiums on it’s basic Part D plan by 130%. Humana’s stockholders should be equally upset.
Mr. Mennino has said Humana’s price increases are “bait and switch” and “gouging”. The reality is Humana lost a ton of money on Part D in the third quarter of 2006, and has to do something to stop the bleeding. By Bob Laszewski’s estimate, Humana’s combined ratio on its Part D program was 108% for that quarter; for every dollar in premium they spent a dollar and eight cents on claims and administration.
The biggest contributor to Humana’s Part D red ink has been their Cadillac “Complete” Plan – the top-of-the-line. The Complete Plan’s loss ratio was 133%. (don’t forget, that does NOT include administrative expenses, which are typically about 15%)
Two key points.
First, the third quarter was supposed to be the one where Part D plans hit profitability as the doughnut hole kicked in and insureds’ out of pocket expenses went up while insurer’s payouts decreased. Clearly that didn’t happen, at least not to the extent that Humana thought it would.
Second, as I’ve been trumpeting since the inception of Part D, adverse selection had a huge impact. Seniors who used a lot of drugs, and therefore knew the doughnut hole would be a big problem, bought the plan that covered the doughnut hole – the Complete Plan. Surprise! They used it, too.
Tough to survive with that business model; therefore the solution is to raise prices.
Clearly Humana’s actuaries and underwriters made a few wrong assumptions; in any new product launch that is to be expected, and the premium increase is certainly appropriate. And my sense is Humana is not alone, as United Healthcare’s early statements indicate their once-rosy outlook for Part D has faded somewhat.
Thanks to Fierce Healthcare for their tip on Mennino’s angst.
The problem as you state is not with Humana. The problem is with Congress. Anyone who has ever had US government contracts understands that you must offer the best (lowest) pricing. Until Congress enacts changes to the Part D plan, the program will continue to drain much needed dollars from primary health care services. Joe, lets talk about Not-for-profit Hospitals someday. Hospitals are one of the last areas of poor governance, enjoy monopoly and tax free status (which they don’t deserve) as well as weak management resulting in duplication of services, poor community health status, increased costs and are major contributors to the issues we discuss here.
Spratt, you’re off the mark, because the discussion isn’t about ideology or policy. It’s about Humana’s business decisions, which were clearly flawed, and can be proven so by looking at the documentation. Humana, from the beginning of Part D, priced below everyone else. Their strategy, which they were not shy about sharing with investors and in other public forums, was called “capture and migrate,” which I noted at the time, sounded suspiciously close to Mayor Mennino’s accusation of “bait and switch.” CEO Mike McCallister said the company hoped to capture large chunks of market share among Medicare beneficiaries with their lowest-priced prescription drug plan, and later up-sell them into the company’s HMOs, PPOs and PFFS plans, where margins were higher. McCallister told Wall Street analysts at the end of Q1 ’06 that the margins on the lowest priced Part D plan would be only 1-2 percent, barely a break-even proposition, and that the Enhanced and Complete plans would have margins in the 3-5 percent range. Getting these folks into an HMO, PPO or PFFS, though, can earn the company margins in the 8 to 12 percent range.
My guess is that at least one, and probably two, things went wrong. Humana’s prognosticators guessed too high on the portion of their Part D buyers who would sign up for the Basic plan, and too low on the number who would take the Enhanced or Complete plan. At the 2Q conference call, McCallister and his other chieftains were asked by an analyst specifically about the customer mix for Part D, and they dodged the question.
All along, Humana has said that if everybody signed up for the Basic (lowest-margin) plan, they would still not lose money. I guess no one ever thought to ask them what would happen if everyone signed up for the Enhanced and Complete plans, since those were supposed to have higher margins.
This reinforces the traditional negative view of those companies what Wall Street always worries about: companies that price “irrationally,” below market to capture market share.
also look at the complete plan…it has a donut hole. use zip code 02110…and boom $5 generic and all the rest…preferred and non-preferred and specialty 100%. it breaks my heart to tell someone they’re in the donut hole.
You are absolutely right. I have dropped into the whole as well and one of my prescriptions is $500 and I have five. Two of those are over $100. If my husband drops into it as well we can no longer afford are meds.I can’t afford mine now but he needs his .
Here’s the real deal people: Prescription costs to determine your gap period is based on the ‘prescption COST’ which costs are plugged in by Humana. There is no authority who monitors their actual costs, therefore they can plug in any amount they want to. They simply calculate backwards and can simply figure out WHEN they want you to reach the gap period.
I called Humans tell them i can’t afford paid my medicines four them 100.00 and i tell them pain medicine cost 257.80 i don’t have none money spend my self i tell Humana i get lowcome every mounths and ii don’t get lot money i paid my bills little some money left but i paid medicines i won’t have any money 4 me spend things i need they said sorry they don’t have any thing help me Humana don’t care every one said them people who can’t afford lot money paid medicines.
Just like myself, I suffer from chronic back pain. And after 5 failed surgeries, I have to use medication because I have no chose. But monthly reports came to me three months after I got my meds. And Humana also put what they wanted into the report and now they don’t even cover several of my meds.Ronnie Lovette
.First, the third quarter was supposed to be the one where Part D plans hit profitability as the doughnut hole kicked in and insureds’ out of pocket expenses went up while insurer’s payouts decreased. Clearly that didn’t happen, at least not to the extent that Humana thought it would.
Second, as I’ve been trumpeting since the inception of Part D, adverse selection had a huge impact. Seniors who used a lot of drugs, and therefore knew the doughnut hole would be a big problem, bought the plan that covered the doughnut hole – the Complete Plan. Surprise! They used it, too.
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