Highmark Revenue Up, Net Income Down

April 04–Fresh off a credit outlook downgrade precipitated by a scandal in its executive suite, Pittsburgh health insurer Highmark Inc. reported Tuesday that total revenue was up but net income down in 2011, compared to the company's 2010 numbers.

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The company brought in $14.78 billion in total revenue in 2011, up from about $14.6 billion, but saw profits slip to $444.7 million, down about 4 percent from $462.5 million.

One of the "strong drivers" in that net income figure was a $124 million tax benefit available to Blue Cross Blue Shield insurers, meaning that the actual, non-tax-affected portion of the net income figure was lower.

The company also directed $100 million in grants to West Penn Allegheny Health System last year, an expense that came out of Highmark's surplus, which stood at $4.1 billion, up from $3.7 billion the year before.

Investment income dropped by about $94 million from 2010 to 2011.

Net income represents about 3 percent of operating revenues, a lower share than 2010 and a profit margin, the insurer noted, "much lower than Highmark's national for-profit, commercial competitors."

"Highmark had a very good year in 2011," said Nanette DeTurk, executive vice president and chief financial officer, in a phone interview.

The results were issued just two days after the firing of Highmark's former CEO, Ken Melani. He was jettisoned Sunday, a week after his arrest for assault and trespass following an altercation at the home of his girlfriend and just three days after the company placed him on unpaid leave.

On Friday, Moody's Investors Service changed the outlook on Highmark Inc.'s insurance financial strength rating and senior unsecured debt to negative from stable. The ratings group also noted that if Highmark is unsuccessful in negotiating a new hospital contract with UPMC (the current deal expires in July 2013), or if it loses more than 5 percent of its member base, ratings on the $1.1 billion in debt — and not just the outlook — may also be downgraded.

Despite that and despite some outlook adjustments from other debt ratings agencies, "We remain financially strong," Ms. DeTurk said.

Highmark said it retained "95 percent of its customers in the large and mid-sized group markets, and grew its national membership base by approximately 51,000 members," despite intense price competition from UPMC Health Plan and several other national insurers that now have full accesses to UPMC's hospitals, including Aetna, HealthAmerica and Cigna.

We "held up surprisingly well during this difficult economic time," and in light of the "extremely competitive marketplace" in Pittsburgh, Ms. DeTurk said.

Highmark again reported strong net income numbers from its three main for-profit subsidiaries, including HM Insurance Group (its reinsurance business growing to $49.6 million in 2011 from $37.8 million), dental unit United Concordia (growing to $89.7 million from $56.7 million) and its vision company (whose net income dropped to $68.2 million from $70.5 million).

That accounts for a total of $207 million in net revenue, about "50 percent of Highmark's bottom line," Ms. DeTurk said. That means that, as in years past, the company's growth is coming from its for-profit subsidiaries, rather than its mainline health business. The dental business brought in record profits, Ms. DeTurk said.

Highmark's total claims paid grew slightly, from $10.61 billion in 2010 to $10.85 billion in 2011, according to the financial summary distributed to media Tuesday.

With claims costs flattening, premiums increases have moderated, too. The company said premium increases for the first half of 2012 have averaged in the single-digit range for most parts of the health business.

"This is an industry-wide trend," Ms. DeTurk said. "We went out with lower rate increases than we would normally be building into our pricing models."

Highmark reported having 3.1 million total customers in the western half of Pennsylvania, a number that includes its largest customers — many of which are major corporations with employees outside of the region who are counted toward Highmark's local total.

Ms. DeTurk also noted that at the end of 2011, Highmark's affiliation with Blue Cross Blue Shield of Delaware was approved. The company also opened two new Highmark Direct retail stores, as well as new vision retail stores, last year.

Bill Toland: btoland@post-gazette.com or 412-263-2625.

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