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Highmark's $432.3M profit in 2012 down from previous year

| Wednesday, April 10, 2013, 9:33 a.m.

Highmark Inc.'s expensive foray into the hospital business and its contract fight with UPMC didn't make a huge dent in its profit last year.

The state's largest health insurer on Wednesday reported net income of $432.3 million for 2012, down 3 percent from the previous year.

But strip away a one-time gain and higher-than-expected investment income, and Highmark's income from operations last year was $90 million, a 72 percent drop from operating income of $327 million in 2011.

Chief Financial Officer Nanette DeTurk told reporters on a conference call that the company's health insurance business is being squeezed, particularly in Western Pennsylvania, by competition from other insurers.

“We are going to see lower margins in the health care business,” DeTurk said. “I would expect that to continue in the next couple years until we can all figure out the (federal health care) reform impact.”

Also contributing to the squeeze was slightly lower net income from Highmark's for-profit subsidiaries in dental, vision and reinsurance, she said. Those businesses added $193.6 million in profit last year, down from $207.5 million the year before.

Highmark could spend up to $1.8 billion on its new health system, including the purchase of West Penn Allegheny Health System, and acquisitions of physician practices, Jefferson Regional Medical Center, St. Vincent Health System in Erie and the building of outpatient medical complexes around Pittsburgh. It had spent $382 million of the total as of the end of 2012, according to filings with the state Insurance Department, which is reviewing the deal for West Penn Allegheny.

Highmark's profit was boosted by a one-time gain of $185.8 million from its late 2011 acquisition of Blue Cross Blue Shield of Delaware, which was renamed Highmark Delaware.

Investment income was $302.4 million, more than double the $148.1 million it reported the year before. DeTurk said strong stock market returns and timely sales of investments led to the gain.

Total revenue was $15.2 billion last year, up from $14.8 billion the year before.

While the company's profit held up in 2012, it's not likely to remain that way for the current year.

A.M. Best Co., a New Jersey rating agency that specializes in insurance companies, on Tuesday downgraded Highmark's financial strength and credit ratings.

“The rating downgrades for Highmark are due to an anticipated decline in its earnings and the financial impact of its proposed affiliation with West Penn Allegheny,” A.M. Best said in a statement.

The health insurer has said it expects 2013 profit to be about $106 million, according to financial projections it has submitted to the insurance department.

The five-hospital West Penn Allegheny system is expected to be the core of a new hospital network Highmark is creating to compete with UPMC, the largest health system in Western Pennsylvania. UPMC has said it will no longer accept Highmark members starting in 2015 because the health insurer will be a competitor.

Despite the possibility of losing access to most of UPMC's 19 hospitals and 3,300 doctors in the region, Highmark said it has retained 95 percent of its customers in the large- and mid-sized group markets. Including West Virginia and Delaware, the company has 5.3 million health insurance members.

The insurance department could issue a decision on the West Penn Allegheny deal by the end of this month. On Monday, the department released reports from two independent consultants hired to examine the financial and competitive effects of Highmark's plan.

The consultants said Highmark's strategy to revitalize West Penn Allegheny and increase competition for medical services would benefit consumers in Western Pennsylvania. But they also said there was substantial uncertainty about Highmark's ability to increase patient volume at the struggling health system — which is key to turning around its finances.

DeTurk declined to comment on that concern but said Highmark would submit written responses to the concerns to the insurance department next week.

“We have a lot of data that we feel we want to put in writing,” she said.

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

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