By Caroline Humer
Feb 7 (Reuters) - Cigna Corp on Friday said costs in its private Medicare business were higher than expected in the fourth quarter and might continue on that path in 2014, resulting in a disappointing outlook and pushing its shares down nearly 9 percent.
The higher costs also caused the company to miss analysts’ fourth-quarter earnings estimates.
“The costs per episode of care are going up, and we see the impact of that in many geographies,” Chief Executive Officer David Cordani said during a conference call with investors.
The U.S. government will propose reimbursement levels for Medicare Advantage plans on Feb. 21, and most insurers have said they expect them to decline.
As a result, pressure on the Medicare Advantage business will intensify industrywide this year, said Susquehanna Financial Group analyst Chris Rigg, who downgraded Cigna stock to “neutral.”
The company, which provides health and other insurance, said it expected 2014 earnings of $6.80 to $7.20 per share. Analysts on average had forecast $7.32, according to Thomson Reuters I/B/E/S.
Shares of Cigna were down 8.8 percent at $77.78 in morning trading.
“There are some concerns there around their operating performance,” Morningstar analyst Vishnu Lekraj said.
Cigna said it expected its medical customers to grow by 1 percent to 2 percent this year. It ended 2013 with 14.2 million customers, 13.7 million of whom were in its commercial business and 492,000 who were in government programs - Medicare for older people and Medicaid for the poor and disabled.
Most of Cigna’s revenue comes from administering benefits for companies, mainly large corporations, that pay the underlying costs of their employees’ medical treatment. The company also provides supplemental benefits and group and life disability insurance.
Cigna has a small role on the exchanges that opened on Oct. 1 and began providing insurance coverage to individuals on Jan. 1 under the U.S. Affordable Care Act. It sells these plans in five states.
CEO Cordani said the customers Cigna had signed up in these plans as of Jan. 1 were skewing more toward older people. Enrollment has lagged, in part because of technology problems. In addition, the extension of plans not compliant with the ACA has drawn away some potential members.
Cordani also said Cigna did not expect this business to be a “money maker” in 2014. On Thursday, larger competitor Aetna Inc said it expected to lose money on the exchanges, where it has received applications for enrollment from 200,000 people.
This differs with WellPoint Inc, which has pulled in about twice the number of applicants as Aetna and has said it expected to make a profit on the business.
As of Jan. 1, Cigna had signed up about 20,000 new members who had paid for their policies, Cordani said in an interview.
The company said it had spent 86.4 percent of the Medicare Advantage premiums it received on medical claims during the fourth quarter, compared with a year-earlier medical cost ratio of 82.2 percent.
Net income fell to $361 million, or $1.29 per share, from $406 million, or $1.41 per share, a year earlier.
The latest results included $40 million in restructuring costs, while those in the 2012 period included $68 million for litigation.
Excluding those items, earnings fell to $1.39 per share from $1.57. On that basis, the profit was 10 cents shy of analysts’ expectations.
Revenue rose to $8.15 billion, beating Wall Street estimates of $7.35 billion.