Health Insurers Sink as Rising Spending Gauge Alarms Investors

(Bloomberg) -- Health-insurance stocks sank across the board after Anthem Inc. became the third insurer to report it is paying out a higher percentage of the premiums it takes in to cover patients’ medical claims.

Investors watch the so-called medical-loss ratio reported by health insurers closely. The number is a key measure of the companies’ financial health; when the ratio goes up, it can suggest that money is leaving the companies faster than it is arriving. Other issues, such as changes in tax law, can also affect the ratio.

Anthem shares fell as much as 7.4%, the biggest intraday drop in three months, after the company said on Wednesday that its medical-loss ratio had climbed to 86.7% in the second quarter, from 83.4% a year earlier. Analysts had expected a ratio of 85.7%, according to data compiled by Bloomberg.

Over the past week, UnitedHealth Group Inc. and Centene Corp. also reported year-over-year increases of the measure. Shares of those companies sank by as much as 3.9% and 3.6%, respectively, on Wednesday.

Shares of large health insurers -- many of which also operate large pharmacy-benefit management units -- had gained last week after the Trump administration dropped a plan to overhaul a rebate system often blamed for keeping drug prices elevated. The S&P 500 managed-care index is still up 17% since hitting a 52-week low on April 17.

Anthem, UnitedHealth and Centene all reported otherwise favorable results, beating analysts’ estimates and raising their outlooks for the year.

Tax Changes

Anthem, which operates Blue Cross Blue Shield commercial plans in 14 states, said the increase in its medical-loss ratio was due to changes in a health insurance tax and dynamics in its Medicaid business in a handful of states. Anthem raised the low end of its 2019 guidance for the measure, which the company calls benefit expense ratio, to 86.2% to 86.5%.

Anthem Chief Financial Officer John Gallina said the increase in the expense ratio didn’t reflect rising medical costs, but rather insufficient reimbursement from state Medicaid programs.

“We have not stated that we’ve seen an increase in medical cost,” he told analysts on an earnings call Wednesday. “The premium reimbursements we are getting are not fully compensating us for the risk that we are taking,” he said.

To contact the reporter on this story: John Tozzi in New York at jtozzi2@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Timothy Annett, Mark Schoifet

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