Aetna Inc (AET.N), the third-largest U.S. health insurer, reported a rise in medical costs on Tuesday, raising investor concerns that a long run of low growth in such costs might be ending and pushing shares in the industry lower.
U.S. insurer profits have benefited from several years of relatively low use of medical services by their members due to an economic downturn and higher out-of-pocket costs for patients.
Aetna said its medical spending rose in the second quarter due to an expensive new treatment for hepatitis C made by Gilead Sciences (GILD.O) and the higher costs of covering patients who bought insurance under President Barack Obama's healthcare law for the first time.
The insurer said that it spent 83.1 percent of the premiums it took in on medical claims, a measure called medical benefit ratio, higher than some Wall Street estimates. It said that ratio increased from 82.5 percent a year earlier.
Aetna shares fell 3.4 percent to $81.94 in early afternoon trading on the New York Stock Exchange. Among rivals, UnitedHealth Group (UNH.N) slipped 1.7 percent, WellPoint Inc WLP.N dropped 2.9 percent and Humana Inc (HUM.N) slid 3 percent.
Aetna executives said the quarter did not represent a new trend and that they expect 2014 medical spending to be at the low end of company forecasts. But investors were skeptical, and cited evidence of higher medical costs when UnitedHealth reported its quarterly profits last week.
"Investors are concerned that cost trend is creeping up," Jefferies & Co analyst David Windley said.
Industry analysts also pointed to the financial performance of U.S. hospitals as another sign that medical use is up. After years of low utilization, hospitals such as HCA Holdings Inc (HCA.N) have reported quarterly profits that blew past Wall Street expectations.
Aetna's chief financial officer said its data did not show any reason for concern.
"When we look at our core business and we look at medical cost trends in the second quarter, everything looks very well behaved," CFO Shawn Guertin said in an interview. "The (cost ratios) are actually down year over year."
Cost increases are tied to the new Obamacare exchange business and the new hepatitis C treatment Sovaldi, he said. The drug was approved in December and costs $84,000 for a 12-week treatment that cures most patients who take it.
Aetna second-quarter profit was boosted by Medicare and Medicaid provider Coventry Health Care. Excluding costs related to that purchase in 2014, earnings were $1.69 per share, above the $1.60 per share that analysts had anticipated.
The insurer raised its 2014 earnings forecast due to greater profits created by the deal, predicting a range of $6.45 to $6.60 per share from $6.35 to $6.55.
Aetna's second-quarter net income rose to $549 million, or $1.52 per share, from $536 million, or $1.49 per share, a year earlier.
Revenue rose to $14.5 billion from $11.5 billion.
(Reporting by Caroline Humer; Editing by Michele Gershberg and Jonathan Oatis)