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UPMC's rivalry with Highmark squeezes profit

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Saturday, Feb. 9, 2013, 12:01 a.m.

UPMC's health plan membership ballooned by 373,217 in the last year and it added 144 physicians to its payrolls between July and December, impressive numbers but for one thing: They come at a great cost.

This underscores the dilemma facing the health giant, owner of the region's largest network of hospitals and doctors and the second-largest health insurance company, as it steps up the competition with Highmark Inc. in the medical insurance market.

The intense rivalry means that UMPC has to shell out more money to woo doctors while cutting prices to win insurance business. This is putting a squeeze on its health plan's profits at a time the company's hospital business is facing cuts in payments from the government and insurers for treating patients.

“There are a lot of pressures in the industry,” said Beth Wexler, analyst for Moody's Investors Service.

UPMC Health Plan membership grew to more than 2 million people as of Dec. 31, a 22 percent increase over the same point a year earlier. But the health plan brought in $49 million less revenue, compared with prices it had charged during the same period the year before.

So while UPMC Health Plan's revenue has grown steadily in the last 18 months, profit margins have shrunk. Insurance revenue rose from $941 million in July-September 2011 quarter to $1.1 billion in the September-December 2012 quarter, UPMC financial statements show. But profit margins dropped from 6.3 percent to minus 0.4 percent over that same period.

Most health insurance companies have profit margins in the 1 percent to 3 percent range, said Joseph Zazzera, a health and employee benefits analyst for A.M. Best Co., a New Jersey-based rating agency that specializes in the insurance industry.

UPMC Chief Financial Officer Robert DeMichiei acknowledged that the health plan is “not as profitable as in the past,” but he said UPMC is not too concerned.

Taking a hit to grow membership is not all bad. The health plan is an important “front door” for patients to access the system's hospitals and doctors, DeMichiei said. This in turn could mean more revenue for its hospital business.

Indeed, while the health giant reported a 61 percent decline in operating income to $85 million for the July-December period, analysts are encouraged by the growth in its health plan, its dominant position in the local market and its $3.9 billion investment portfolio.

UPMC and its health plan are “well-positioned competitively and have a very solid financial model,” Wexler said. A.M. Best upgraded ratings on UPMC Health Plan last month but lowered its outlook from positive to stable.

Highmark, the state's largest health insurance company, has 4.9 million members. It is attempting to buy West Penn Allegheny Health System as the core of a new medical provider network.

Spokesman Michael Weinstein said Highmark “was successful at growing its overall membership in 2012.”

The Highmark-UPMC battle is leading to aggressive pricing of insurance premiums by both organizations, said Tom Tomczyk, principal in the health care practice at Buck Consultants, Downtown.

“They're trying to be as aggressive as they can to bring in more clients,” Tomczyk said.

As Highmark builds its own network of hospitals, a bidding war for physicians has broken out. UPMC spent $39 million between July and December to add 144 physicians to its employed ranks, which now total 3,384.

Highmark has hired about 100 physicians in the last year — some it lured away from UPMC and others it convinced to sell their private practices.

“It's no secret that West Penn Allegheny and Highmark are also hiring,” DeMichiei said.

Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or

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