UPDATE: Aetna Says Higher Costs Hurt 2Q Net, 2009 Outlook

   DOW JONES NEWSWIRES 
 

Aetna Inc. (AET) reported a 28% drop in second-quarter profits and significantly slashed its 2009 outlook because of higher-than-expected medical costs, sending shares down more than 10% in premarket trading.

The Hartford, Conn., health insurer again blamed the higher costs on recessionary factors, such as members accelerating their use of medical services, and said it was taking "appropriate actions" to address the situation.

Nonetheless, the results and reduced guidance - the second time its lowered 2009 views in less than two months - further raises concerns that the health insurer's recent gains in market share were due to underpricing.

Aetna's problems this year echo those of its peers last year as other health insurers struggled with pricing, medical costs, membership and profits. In comparison, for most of 2008, Aetna maintained its earnings forecast and expanded its lucrative commercial health-plan enrollment.

Aetna "has had a more aggressive posture with respect to enrollment growth the last few years, and it is simply catching up to them," Morgan Stanley analyst Doug Simpson said in a research note Monday.

"It will take several quarters for [Aetna] to roll through higher prices, shed more members and restore margin stability in its book."

Simpson added that based on Morgan Stanley's surveys, medical cost trends remain broadly stable and Aetna is raising prices by more than its peers to catch-up after pricing decisions made in recent years.

Aetna shares, down 7.2% year to date, recently 10.6% to $23.65 in premarket trading.

The company said Monday that it continues to see upward pressure on medical costs beyond what it projected in early June, the last time it warned, driven in part by changing provider behavior in the face of a deep recession.

Earlier this year, Aetna discussed how members seemed to accelerate their use of medical services after layoffs or when worried about losing jobs. In addition, the company said Monday that it is continuing to see a higher level and number of services applied on a per-patient basis at hospitals, linking the phenomenon to the weak economy.

"We did not fully capture the impact of these forces in our 2009 pricing," Aetna Chairman and Chief Executive Ronald Williams said. The company added that it aims to address the situation by making moves like pricing actions, enhanced medical management and provider contracting.

For 2009, Aetna now projects per-share operating earnings between $2.75 and $2.90, down from its previous view of $3.55 to $3.70 and well below its original outlook of $3.85 to $3.95. In 2008, Aetna had operating earnings of $3.93 a share.

Analysts, on average, were expecting earnings of $3.57 a share, which already was down from their average $4.09 per-share estimate at the beginning of 2009, according to Thomson Financial.

"We had expected AET to miss again this year, but the size of the shortfall was larger than expected," Simpson said.

For the quarter ended June 30, Aetna posted income of $346.6 million, or 77 cents a share, down from $480.5 million, or 97 cents a share, a year earlier. Excluding capital gains and losses among other items, earnings fell to 68 cents from 94 cents. The company had said in June it expected 76 cents to 80 cents, and analysts, on average, were expecting earnings of 78 cents a share, according to Thomson Reuters.

"Our second-quarter results do not meet our expectations or the standards we have established," Chairman and Chief Executive Ronald Williams said Monday. "This is disappointing, but it can be fixed."

Revenue increased 11% to $8.67 billion, slightly above the average analyst estimate of $8.56 billion on Thomson Reuters.

Total medical benefits ratio, or the amount of premiums used to pay patient medical costs, jumped to 86.8% from 81.9% a year earlier. The company's ratio for commercial plans were 85.9%, or 84.6% excluding unfavorable reserve development.

Medical membership rose 8.9% from a year earlier and was flat with the prior quarter at 19.1 million.

Earlier Monday, The Wall Street Journal reported that Aetna had put its pharmacy-benefit management business on the block, citing people familiar with the matter.

Aetna's business, which manages prescription-drug benefits for about 11.2 million members, has been shopped around by bankers at Bank of America Merill Lynch and Credit Suisse, say these people. Industry players such as CVS Caremark Corp. (CVS) and Medco Health Solutions Inc. (MHS) are all taking a look, they added.

-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; [e-mail]

(George Stahl contributed to this report.)