Aetna, facing healthcare overhaul, holds down costs

NEW YORK Thu Oct 25, 2012 11:58am EDT

NEW YORK (Reuters) - Health insurer Aetna Inc (AET.N) said it was able to hold down costs by directing more of its plans to U.S. medical providers that focus on efficient care, helping it beat quarterly profit expectations and raise its earnings forecast for the year.

The third-largest U.S. health insurer is on the frontlines of a national healthcare overhaul that will be largely in place in 2014.

Aetna said that next year it will shift even more of its commercial and Medicare business to these groups, known as accountable care organizations, which are offered incentives to improve the quality of care while lowering costs. Medicare is the government health plan for older Americans.

The shift should help it weather government efforts to rein in reimbursement for Medicare and the Medicaid program for the poor, as well as expected fees and taxes on the industry down the road, the company said.

Its shares were up 1 percent in midday trading, ahead of a 0.5 percent rise for the Morgan Stanley Healthcare Payor Index .HMO of industry peers.

"Overall, it was a solid operating quarter. A big part of this business is that in order to have a sustainable margin structure, you need to bring down costs, and they demonstrated that in this quarter," said Leerink Swann analyst Jason Gurda.

Aetna expects earnings to improve in 2013 from 2012 but did not give a specific forecast and said that it is uncertain about the extent that consumers' use of healthcare will grow. Use of medical services has been at record low rates in recent years due to a weak economy and high unemployment, helping insurer profits by keeping claims costs low.

The so-called "fiscal cliff" - about $600 billion in automatic government budget cuts that could come into play next year - is another uncertainty for the industry and the U.S. economy.

"We are very concerned about it. Not just for our business and shareholders but for people in general," Aetna Chief Financial Officer Joseph Zubretsky said in an interview.

He said Aetna could be affected as consumers either rein in their own spending yet again due to economic distress, "or in the wake of possible further unemployment, (spend) as much as they can in their current benefit programs with the prospects of losing their job."

FOURTH QUARTER TOUGHER TO FORECAST

Aetna's report comes one week after the largest U.S. health insurer, UnitedHealth Group (UNH.N), also reported better than expected earnings. UnitedHealth also expects a stronger performance in 2013, but warned analysts not to be too optimistic because of the uncertain economy.

Aetna's third-quarter profit rose to $499.2 million, or $1.47 per share, from $490.4 million, or $1.30 per share, a year earlier. For a graphic, see: link.reuters.com/kas43t

Excluding tax benefits and other special items, earnings rose to $1.55 per share from $1.40. That was ahead of analysts' average estimate of $1.34, according to Thomson Reuters I/B/E/S.

To account for these higher earnings, but taking into account uncertainty about profitability in the fourth-quarter, Aetna raised its 2012 outlook to the top end of its previous forecast range of $5.00 to $5.10 a share.

Aetna said it expects fourth-quarter operating earnings of 92 cents per share, below analyst forecasts, and said in a conference call with investors that it expected to spend more because of the U.S. healthcare reform. It kept its 2012 membership goal intact.

Zubretsky said on a call with investors that it is always tough to forecast costs in the fourth quarter as more members pass their deductible threshold of healthcare services that they pay out of pocket before insurance kicks in, increasing Aetna's claims costs.

Zubretsky said he expected 2013 earnings to improve and that Aetna's planned $5.6 billion purchase of Coventry Health Care Inc CVH.N would add to earnings in subsequent years.

Excluding transaction costs, he expects the acquisition to add 45 cents per share in 2014 and 90 cents per share in 2015.

Aetna's percentage of premiums paid for medical expenses was 80.7 percent in the third quarter, up from 78.9 percent a year earlier.

Revenue increased to $8.9 billion from $8.4 billion, in line with expectations. The company attributed the rise to higher insurance premiums in its commercial, Medicare and Medicaid businesses.

Aetna added 149,000 new medical members in the quarter to reach its full-year goal of 18.2 million.

(Reporting by Caroline Humer in New York; Editing by Michele Gershberg, Dale Hudson and Tim Dobbyn)

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