In Indiana, everyone makes big profits on health care

It looks like everyone is making good money on health care in Indiana.

We already knew that was the case for hospitals in the Indianapolis area, whose reimbursements for both inpatient and outpatient care are at the top of the heap when compared with other cities. Hospitals in such cities as Anderson, Bloomington, Fort Wayne and Kokomo are doing just fine, as well.

Physicians don’t do too badly either, especially in recent years as hospitals have been sharing some of the wealth by employing physicians, which allows them to charge roughly twice as much for key procedures.

Nursing homes get a chunk of additional revenue, compared with peers in other states, and most of them are now getting extra federal money through partnerships with county-owned hospitals.

And, of course, drugmakers like Eli Lilly and Co. and medical-device makers like Zimmer Holdings Inc. enjoy the fattest profit margins in the industry—even though their products account for a small portion of overall health care spending.

With that extra money flowing to all those health care providers, you might think the state’s health insurers must be taking it on the chin.

But you would be wrong.

Indiana is the most profitable state for Indianapolis-based WellPoint Inc., which operates Blue Cross and Blue Shield health plans in 14 states. And WellPoint isn't even the most profitable health insurer in Indiana.

Those points were made clearly by a recent report from Citi Research, which shows WellPoint’s 2012 financial results from its commercial risk insurance in each of those states. Those figures include all the individuals and employers that purchased actual insurance from WellPoint’s Anthem subsidiary. But they do not include the money spent by self-funded employers, who hire large insurers like Indianapolis-based WellPoint or third-party administrators merely to administrate their health plans, not to take on the financial risk of them.
 
I looked at underwriting profits—that’s the percentage of premiums not spent on medical claims and administrative expenses, excluding any gain or loss from investments—for each of WellPoint’s 14 states.

The margin for Indiana in 2012 was 5.8 percent—38 percent higher than the average across WellPoint’s entire commercial risk business. The next-highest states were California at 5.3 percent and Kentucky at 4.9 percent.

In 2011, Indiana tied with California as WellPoint’s second-most-profitable state, with an underwriting margin of 5.5 percent, or 31 percent higher than average. Connecticut was highest that year, with an underwriting margin of 5.9 percent.

It should be noted that these underwriting profits are actually down from what they were before Obamacare, which started requiring health insurers to issue rebates to consumers if less than 80 percent of their premiums went toward medical claims.

In 2006, for example, when the economy was roaring and Obamacare wasn’t around, Anthem had an underwriting profit in Indiana of 10.3 percent, according to filings with the Indiana Department of Insurance.

It also should be noted that things are changing in health care. Hospitals aren’t making the kind of money they were even as recently as 2012. Insurers created narrow networks for their Obamacare exchange plans in what was a rare move to limit patients’ choices—at least here in Indiana.

So the situation in 2012 is not the situation now.

That said, something about the health care market here clearly allows all the players to make larger profits than most of their peers nationally.

Consider that UnitedHealthcare earned 2012 underwriting profit in Indiana of 7.3 percent, which ranked 10th out of 44 states in which Minnesota-based United insures at least 2 ,000 people.

For Humana Inc., Indiana ranked fifth out of 23 states in which the Louisville-based company insures at least 2,000 people. Its underwriting margin here in 2012 was 3.6 percent.

When it comes to selling health isnurance to small employers, the profits are particularly large. WellPoint's underwriting margin on small employer groups was 10 percent in Indiana in 2012—highest among all its states. UnitedHealthcare's margin on small employers was 10.2 percent—fifth highest among its 44 states with significant market presence.

So why do insurers make more money here?

It could be Indiana’s insurer-friendly regulators.

But I would chalk it up more to the games health care providers and insurers—especially Anthem—have played for years on prices, allowing them to rise aggressively so long as Anthem could tout that it had larger discounts than other insurers.

But the largest discount on something that rises 8 percent to 12 percent every year is not holding down the cost of care—not in the least.

Why didn’t Anthem more forcefully hold down providers on price? Some of it had to do with the distinct territories many hospital systems had, which lessened competition.

But more than that, employers have never wanted to tell their employees no on anything—especially on choice of physician. So HMOs never caught on here. Neither did the aggressive expense management that companies like United use much more broadly in other states.

Instead, everybody in the health care business made lots of money—and Indiana’s health care costs grew to be billions more than other states pay. That's been good for the health care industry, but not for the rest of the state.