Aetna 2Q profit falls on higher-than-expected cost

By TOM MURPHY and MARLEY SEAMAN, AP Business Writers
Associated Press
July 27, 2009

INDIANAPOLIS (AP) -- Health insurer Aetna Inc. chopped its 2009 profit outlook for the second time since June on Monday and said its second-quarter profit sank 28 percent, as medical costs rose faster than it expected.

Hartford, Conn.-based Aetna blamed health care providers and the slumping economy for costs that exceeded what the managed care company expected when it set premiums. Aetna said the amount of work providers are doing on patients per diagnosis has increased, as they look to squeeze out more revenue.

"We think there's a tendency to maximize or optimize their revenue streams by doing more things," Aetna Chief Financial Officer Joe Zubretsky said. "Clearly there's a behavior change."

The increase in costs for its commercial business - which includes private employer-sponsored coverage and individual policies - led to bigger bills for emergency room, urgent care, laboratory and preventive services.

The insurer has seen a rise, in particular, in claims costing between $10,000 and $50,000 since late last year.

Analysts also have said they felt Aetna set prices too low this year in the competitive commercial market, which contributed to the company's performance.

Aetna leaders said Monday they think they now have a good grasp on what to expect for the remainder of 2009.

"I would say we have, at this point, a high degree of comfort," Chairman and CEO Ronald A. Williams said during a conference call with analysts.

The company now expects adjusted earnings of between $2.75 to $2.90 per share. On June 2, it lowered its profit estimate to a range of $3.55 to $3.70 per share from previous guidance of $3.85 to $3.95 per share.

Analysts expect earnings of $3.53 per share on $34.35 billion in revenue.

Aetna said it earned $346.6 million, or 77 cents per share, in the second quarter compared with $480.5 million, or 97 cents per share, in the same quarter last year.

Adjusted earnings per share were 68 cents. Revenue grew 11 percent to $8.67 billion from $7.83 billion.

The adjusted profit - which excludes litigation-related insurance proceeds and net realized capital gains - fell far below analyst expectations. Thomson Reuters said analysts predicted, on average, 78 cents per share and revenue of $8.56 billion.

Medical costs soared 18 percent in the second quarter to $6.1 billion.

Aetna said its commercial medical benefit ratio, which measures the percentage of premiums paid to cover medical claims, rose to 85.9 percent from 80.5 percent a year ago.

Medical membership rose 9 percent to 19.1 million compared to the same quarter last year.

The company was scheduled to announce its earnings on Wednesday. But Aetna moved up the announcement two days to let people know as soon as possible about the outlook change, Zubretsky said.

Higher-than-expected medical costs also hurt Aetna's first-quarter performance. The company's shares fell 72 cents, or 2.7 percent, to close at $25.72.

But Oppenheimer analyst Carl McDonald said in a research note the stock "probably won't stay down for long."

"It feels like Aetna has finally lowered its earnings base enough, and the company is assuming the higher cost trends persist through the balance of the year," he wrote.

The Wall Street Journal reported Monday that Aetna is shopping its pharmacy benefits management business, which had about 11.2 million members at the end of the second quarter.

Williams declined to comment on the report.

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