Aetna Profit Declines As Health-Care Costs Rebound
04/26/2012| 04:53pm US/Eastern
--Aetna earnings decline, missing analyst expectations
--Insurer didn't benefit from surplus money set aside to pay claims, as it did a year ago
--Company reiterates full-year guidance
(Adds company comments regarding expected cost trends and reserve assumptions. Adds closing stock price.)
By Jon Kamp
Aetna Inc.'s (>> Aetna Inc.) first-quarter earnings declined 13%, falling short of Wall Street expectations, after the insurer found it didn't have a surplus in money set aside to cover earlier patient claims, a possible indication patients are making more doctors visits after a long slump.
Aetna and other insurers establish reserves to cover claims for the current period and prior ones. If those reserves wind up too high, as has been the trend with patients lightly using health-care services, the extra money is added to earnings.
In the first quarter, the money Aetna set aside for fourth-quarter claims turned out to be more on target, leaving less money to add to the bottom line. Aetna pegged the lack of extra money to stabilizing medical costs late last year, but was hesitant to suggest usage trends are significantly changing.
Everybody is "sort of feeling for the bottom here where a trend stops decelerating and starts to tick up," said Mark Bertolini, Aetna's chairman and chief executive, on a call with analysts.
The company on Thursday maintained its forecast for an uptick in health-system usage this year. A spokeswoman said Aetna is comfortable with its reserve assumptions for the first quarter based on its expectation for rising costs. Chief Financial Officer Joseph Zubretsky said on the call that Aetna has made "prudent assumptions regarding medical cost trends for 2012."
Still, the disappointing results spooked investors, who sent Aetna shares plunging, down 8.2% to $45.31. The news also weighed on some other insurers, as UnitedHealth Group Inc. (UNH) slipped 0.9% to $58.37, and Cigna Inc. (>> CIGNA Corporation) declined 1.4% to $47.56.
There could be broader implications, as Goldman Sachs analyst Matthew Borsch said the pressure on margins seen at Aetna "reflects industry trends more than company-specific issues." This pressure comes from a mix of modestly increasing medical cost trends and intensifying price competition, the analyst said.
Health-care observers have been watching for an acceleration in medical usage after a long period of patients avoiding visits to doctors' offices and hospitals because of the still-uncertain economy. Recent signals from around the health-care sector have been mixed, with signs of higher spending coming from some corners, such as among replacement-joint manufacturers.
CFO Zubretsky said Aetna's results reflect "the stabilizing medical cost trend we observed in the fourth quarter." He noted that earlier last year, trends that reflect a mix of health costs and how much patients use the system decreased significantly below Aetna's expectations, leading to positive reserves.
In an interview, Zubretsky added that the company isn't saying this cost trend picked up in the fourth quarter. Rather, "I would say it stopped decelerating," he said.
Aetna said its total medical-benefit ratio--or the amount of premiums used to pay patient medical costs--rose to 81.5% in the first quarter, from 79.2% a year earlier and 80.7% in the prior quarter.
The ratio was pushed lower last year by the fact Aetna set aside more money than it wound up needing to pay claims. "There was no significant prior-years reserve development in the first quarter of 2012," Aetna said Thursday.
Overall, Aetna reported a first-quarter profit of $511 million, or $1.43 a share, down from $586 million, or $1.50 a share, a year earlier. Operating earnings in the latest period were $1.34 a share.
Revenue excluding capital gains and losses increased 6.2% to $8.86 billion, mostly owing to higher health-care premiums and fees. Analysts polled by Thomson Reuters had projected earnings of $1.40 a share on revenue of $8.69 billion.
After the strong results from other insurers, "and the market's optimistic assumptions about where Aetna's guidance could go, it's hard to see how this quarter isn't viewed as a disappointment," Citigroup analyst Carl McDonald said.
Despite the light first-quarter earnings, the company reiterated its guidance for full-year operating earnings of about $5 a share, while saying it expects to boost membership over the year after a first-quarter decline.
Aetna ended the first quarter with about 17.9 million medical members, a decline of 544,000 from the fourth quarter, reflecting an expected decrease in the company's commercial business and the company's exit from Connecticut's Medicaid program. Bertolini said Aetna expects to grow to 18.2 million medical members over the course of this year.
"We're seeing positive momentum in our 2013 selling season with early National Accounts wins and new business opportunities that are twice what they were a year ago," the CEO said.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728; email@example.com
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