Aetna said lower costs, higher premiums boosted profit

Tue Apr 30, 2013 10:32am EDT

A trader points up at a display on the floor of the New York Stock Exchange in this August 20, 2012 file photo. REUTERS/Brendan McDermid/Files

A trader points up at a display on the floor of the New York Stock Exchange in this August 20, 2012 file photo.

Credit: Reuters/Brendan McDermid/Files

(Reuters) - Aetna Inc (AET.N) on Tuesday reported a first-quarter profit that beat analyst expectations as customers used medical services lightly and revenue in the health insurer's Medicare and Medicaid businesses rose 7 percent due to higher premiums.

The company forecast increases in enrollment and raised its 2013 profit projection to account for its better first quarter. It also added in the negative effects of government cuts to payments for the Medicare health plan for the elderly.

In addition, Aetna said that it was preparing for changes in the U.S. healthcare system that will take place in 2014 under President Barack Obama's Affordable Care Act.

That law, which has increased the number of preventive services that insurers must offer, is expected to provide insurance to 30 million Americans over a decade.

Aetna plans to participate in individual exchanges in 14 states, Chief Executive Mark Bertolini said during a conference call. Previously, the company had targeted 15 exchanges.

Aetna has also begun to file applications to sell insurance plans in some of those states, including information on anticipated premium rates. Bertolini said in some regions those rates reflect contracts that Aetna has negotiated with hospitals and doctor groups. Those contracts are priced between Medicare rates and higher private commercial rates, he said. The others were based simply on commercial rates.

"We are not going to go in as a land grab," Bertolini said.

Premiums are expected to rise next year, particularly for young men, as insurers must begin providing plans to more people and must cover the cost of more preventive services.

Aetna will also sell plans on the small group exchanges, which sell insurance to businesses, in a small number of states, Bertolini said.

LIGHT MEDICAL SERVICES USE

Aetna's planned purchase of Coventry Health Care Inc CVH.N, which focuses on administering Medicare plans, is part of its strategy to grow from the expansion of insurance under reform.

The company said net income had fallen 4 percent to $490.1 million from a year earlier due to costs from the pending acquisition.

Excluding those costs and capital gains, earnings rose to $1.50 per share from $1.34. On that basis, analysts were expecting $1.39 per share, according to Thomson Reuters I/B/E/S.

Aetna said revenue increased to $9.54 billion and that operating expenses had fallen during the first quarter because of cost-cutting.

First-quarter results showed that U.S. consumers, hurt by unemployment and the weak economy, continue to cut back on using medical services, one analyst said. That helps insurers' profits and hurts results at hospitals.

"All indications from what we've been hearing, not just from insurance companies but from providers, is that there is a flat trend to slightly negative trend in healthcare costs over the past three to four months," said Vishnu Lekraj, an analyst at Morningstar Inc.

Competitors like the larger UnitedHealth Group Inc (UNH.N) and WellPoint Inc (WLP.N) already reported their first-quarter earnings and said they were helped by low medical use.

Aetna said the percentage of premiums paid for medical expenses fell in commercial insurance, but rose in its Medicare and Medicaid divisions. Overall, the medical benefit ratio was 81.9 percent, up from 81.5 percent a year earlier.

2013 OUTLOOK

Aetna forecast 2013 earnings of $5.50 to $5.60 per share, in line with analysts' estimates of $5.53. It previously said it expected a profit of at least $5.40.

Neither outlook includes the Coventry purchase, which Aetna said would add to earnings and was due to close soon.

The new outlook does include the effects of government sequestration, which has resulted in an across-the-board cut to Medicare payments, Aetna Chief Financial Officer Shawn Guertin said on the conference call.

The company had 18.3 million medical customers at the end of March, helped by growth in its private Medicare business, and said that number would rise slightly this year to 18.4 million.

Aetna's shares rose 2.2 percent, or $1.30, to $57.48 in morning New York Stock Exchange trading, near their year high of $57.40.

(Reporting by Caroline Humer; Editing by Lisa Von Ahn)

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