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A deep dive into 2009 FEHB
premium rates
Scott Fidel
Research Analyst
(212) 250 3716
scott.fidel@db.com
Justin Bowers
Research Associate
(1) 212 250 8564
justin.bowers@db.com
Gregg Genova
Associate Analyst
(1) 212 250 0128
gregg.genova@db.com
FEHB headline rates to increase 7.0% in 2009; 5.7% for public MCOs
We have conducted our annual analysis of 2009 product offerings in the Federal
Employee Health Program (FEHB). Overall FEHB rates will increase more
meaningfully in 2009 after two years of modest rate increases that hovered near
only 2%, due to higher rates at the Blues' "cost plus" plans. Three of the six
participating public MCOs are showing higher rate increases. When excluding
Blues’ plans, we calculate the average premium increase for other plans in FEHB
will be 5.3% in 09, down 130 basis points from the 6.6% average increase in 08.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Channel Check
Companies featured
Aetna (AET.N),USD21.71 Buy
AmeriGroup (AGP.N),USD26.51 Hold
CIGNA (CI.N),USD14.70 Buy
Centene (CNC.N),USD17.92 Hold
Coventry Health Care (CVH.N),USD11.85 Hold
Health Net (HNT.N),USD9.91 Hold
HealthSpring (HS.N),USD15.38 Hold
Humana (HUM.N),USD30.32 Hold
Magellan Health (MGLN.OQ),USD32.05 Hold
Molina (MOH.N),USD20.48 Hold
Universal American (UAM.N),USD10.97 Hold
UnitedHealth Group (UNH.N),USD21.45 Buy
WellCare Health Plans (WCG.N),USD13.13 Hold
WellPoint (WLP.N),USD36.77 Buy
Global Markets Research Company
Consumer-driven products priced at 30% discount to traditional plans
FEHB is expanding its consumer-driven product portfolio for 2009; given their
lower price points this mix shift to more CDHPs reduces the overall average rate
increase for health plans in 2009. FEHB will offer 426 consumer-driven/highdeductible
health plan (HDHP) options in 2009 (86 more than offered in 2008) at
price points that are on average 30% lower than traditional managed care
offerings. Notably, the health plans raised prices only modestly (by 1.4%) on
existing CDHPs for 2009, following only a 2.9% increase for CDHPs in 2008, and
an even lower 2.1% increase in 2007. Conversely, we calculate that premiums in
traditional managed care products in FEHB will increase by 8.3% (8.1% excluding
the Blues) in 2009. The 8.1% projected increase in traditional managed care plans
in FEHBP is in line with the 8.0-8.5% price increases we project in the overall
commercial market in 2009. However, the relatively higher average rate increases
when including the Blues suggests that medical cost trends are also increasing
across the industry since they are underwritten on a “cost plus” basis.
Rate increases for United and Coventry track at low end among public MCOs
Notably, average premium rates will decline by 5.5% across United’s products and
will increase by only 4.8% for Coventry’s plans. The average rate decline at United
is heavily influenced by an increase in the number of CDHP offerings; average
premium rates for United’s traditional plans in FEHB will increase by around 7%,
which is still at the low end of the peer group range. Coventry’s rates for its
traditional plans will also increase by less than the peer group average at around
7%. We are concerned that Coventry’s rate increases track below peers given the
higher than expected medical cost trends and margin pressures the company has
recently observed in its FEHB book during 2008. We thus have low confidence
that these rate increases will be sufficient for CVH to stabilize its FEHB margins in
2009; FEHB HMO slice business accounts for an above-average 4.5% of CVH’s
total Commercial risk revenues. Based on the 2009 FEHB pricing data, we are
reducing our 08-10 EPS ests and PT for CVH. We also trim UNH PT to $26 from
$27 to reflect the company’s below-average price increases in its FEHB book.
Valuation/risks
The full managed care group is currently trading at a P/E multiple of 6.0 times our
2009 earnings estimates, nearly a 40% discount to the overall market. Downside
risks to our industry view include higher than expected medical cost trends,
changes (cuts) to Medicare Advantage reimbursement, increased industry pricing
competition in the Commercial business, and increased realized investment
losses. See page 28 for details.
Table of Contents
Investment thesis .....................................................................................................................3
DB estimates and price target actions ......................................................................................4
DB analysis of 2009 FEHB pricing.............................................................................................5
FEHB Premium Rate Tables by Company, 2008-2009............................................................13
Valuation ................................................................................................................................28
Risks ......................................................................................................................................28
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