May 24 (Bloomberg) -- Health insurer Health Net Inc.’s low California premiums run the risk of attracting a sicker clientele that may backfire by driving up its medical costs.
Health Net’s rates were the lowest across Southern California in the new online insurance markets outlined by state regulators yesterday, Scott Fidel, a Deutsche Bank analyst, told clients today in a research note. With the markets projected to skew toward a sicker population next year, offering the most attractive rates may leave the carrier vulnerable, he said.
“Given the underwriting challenges that Health Net has faced historically in the California individual market, we were not expecting to see the company charge out of the gates with the lowest exchange price points across SoCal,” Fidel said. “The company’s low premiums could create the potential” for a flood of high-cost membership.
California is setting up the insurance exchanges under President Barack Obama’s 2010 Affordable Care Act and yesterday announced it had chosen 13 insurers to participate. As many as 5.3 million people may be eligible to buy government-subsidized plans on the new markets, which will cater to small businesses and people not covered on the job.
Health Net, based in Woodland Hills, California, reduced its annual profit forecast twice in 2012, blaming claims-processing problems and higher-than-anticipated medical costs among its members. Its shares fell 20 percent last year.
Health Net declined 2.2 percent to $31 at the close in New York, its biggest one-day loss in five weeks. The shares had gained 30 percent this year through yesterday after the company reported first-quarter profit that beat analysts’ estimates.
The insurer will offer a premium for a middle-income 40-year-old customer in Northern Los Angeles that’s 12 percent cheaper than any other plan, Fidel said, citing a state report. In the San Diego area, Health Net’s premium will be 13 percent below the nearest competitor, Indianapolis-based WellPoint Inc.
Health Net’s policies will offer a narrow network of doctors designed to keep costs down. Nonetheless, “the company has spoken cautiously about the difficult regulatory and operational climate” in California, Fidel said. “In this context, we are surprised.”
Health Net Response
Deutsche Bank’s analysis doesn’t take into account changes that have occurred in the insurance market, said Brad Kieffer, a Health Net spokesman.
The health law imposes fees on all insurers that are intended to help those that get stuck with unusually costly customers and has other regulations meant to spread the risk, Kieffer said. Health Net has been able to negotiate good rates with providers while collaborating with them to improve care, he said.
“Those tailored networks have served us well in the past,” he said by telephone. “We believe this approach positions us well in the future in the exchange world.”
Not all analysts were as concerned as Deutsche Bank’s Fidel.
Health Net’s rates leave it “well-positioned in important So-Cal county regions,” Brian Wright, a Monness Crespi Hardt & Co. analyst in New York, said in a research note. The company’s narrow networks typically achieve 30 percent lower costs than traditional HMO plans, he said.
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