UPDATE 2-Cigna says early Obamacare enrollee costs are high

Thu May 1, 2014 11:56am EDT

(Recasts, adds CEO and analyst comments, share move)

By Caroline Humer

May 1 (Reuters) - U.S. health insurer Cigna Corp on Thursday said that early enrollees in new plans created under President Barack Obama's healthcare law used medical services more than it expected, confirming early forecasts it would lose money on the business in 2014.

The loss tied to Obamacare, which accounts for 3 percent of Cigna's revenue, did not prevent Cigna's first-quarter earnings from beating Wall Street expectations.

Company shares gained 3.5 percent as its much larger employer-based and government Medicare businesses improved, due to stronger cost controls and relatively light use of medical services by customers, partly due to a moderate flu season.

The report by Cigna follows earnings beats by larger competitors WellPoint Inc and Aetna Inc for the first quarter as well. They also said visits to doctors and hospitals were light.

Cigna Chief Executive Officer David Cordani said the company now expects to sign up about 116,000 people for 2014 health plans that have the new benefits required under Obama's Patient Protection and Affordable Care Act, about 20 percent more than it had expected.

The mix of new members who signed up close to an April deadline for coverage matched Cigna's expectations in terms of age and type of plans selected, Cordani said. But people who had signed up earlier in the enrollment process, which began in October, are accounting for higher medical costs than the company had planned for.

Nationwide, more than 8 million have signed up for Obamacare plans, according to federal data. The Obama administration is expected to give a final tally soon.

"The early look at results from the Wave 1 enrollees ... is less attractive versus our expectation and less attractive than any of our business norms as relates to medical cost and medical service consumption," Cordani said in an interview, referring to people who signed up in the first few months of enrollment.

Cordani said Cigna may expand into several new Obamacare markets in 2015 on the expectation that there is long-term opportunity in the business. Health insurers are due to submit their proposed plans, including pricing, to regulators by the end of next month.

OBAMACARE'S BUSINESS MODEL

Cigna's commentary on Obamacare adds to a developing picture on whether the exchanges will be sustainable in the long run. Their insight on the shift in enrollee age - and possibly health - matches those from larger competitors Aetna and WellPoint.

But it was the first to provide details on medical use by early customers. Aetna has only said it expects the Obamacare business to be a "headwind" this year while WellPoint said on Wednesday it will earn a profit of 3 to 5 percent.

The differences could reflect each company's own experiences in the individual market, which has long been dominated by Blue Cross Blue Shield plans, one analyst said. That can help with setting the right level of plan premiums to cover costs.

"The individual market relies heavily upon how much of your presence is in the market currently. So WellPoint tends to have a lot of deep membership in certain markets. Cigna may not have that advantage," Morningstar Research analyst Vishnu Lekraj said.

Cigna's overall quarterly financial performance improved from the previous quarter, when it missed analysts' earnings estimates, saying costs in its Medicare business were higher than expected.

Cigna reported first-quarter net income of $528 million, or $1.92 per share, up from $57 million, or 20 cents per share, a year earlier, when it took a charge for exiting a business.

The company reported earnings of $1.83 per share, excluding investment gains. On that basis, analysts on average were expecting $1.54, according to Thomson Reuters I/B/E/S.

Revenue grew in the quarter as the company added members and collected more premiums. It also beat expectations, reaching $8.5 billion, compared with analysts' estimates of $7.7 billion.

Cigna ended the quarter with 14.17 million medical customers, up from 14.08 million at the end of 2013.

The company raised its 2014 earnings outlook to a range of $7.05 to $7.35 per share. In February, it said it had expected $6.80 to $7.20. (Reporting by Caroline Humer; Editing by Michele Gershberg, Lisa Von Ahn and Chris Reese)