April 29, 2009 / 10:17 AM / 10 years ago

UPDATE 4-Aetna medical costs spike, shares tumble

 * Economy seen as culprit for costs
 * Q1 EPS of 96 cents vs 93-cent Wall St estimate
 * Backs 2009 EPS forecast
 * Shares fall 9.3 percent
 (Recasts, adds CFO comment, analyst's comment, updates share
 By Lewis Krauskopf
 NEW YORK, April 29 (Reuters) - Aetna Inc AET.N reported
higher-than-expected medical costs in its business serving
employers on Wednesday, sending its shares down 9 percent and
overshadowing quarterly profit that was slightly above
 The No. 3 U.S. health insurer, which backed its full-year
profit forecast, blamed the weak economy for the unexpected
cost spikes, as people use medical services in fear of losing
their insurance if they are laid off and growing numbers turn
to post-employment health coverage.
 The report from Aetna contrasts with first-quarter results
from rivals, which have posted profits that easily topped
analysts' estimates.
 "Most everyone has seen better (medical cost) trends and
have not referenced any kind of concerns," said David Heupel, a
portfolio manager with Thrivent Investment Management. "They
are sticking out in that regard this reporting season."
 Analysts have speculated the weak economy would help health
insurers because people would hold back on medical spending,
but Aetna's report suggests otherwise. Still, shares of most
rival health insurers rose moderately on Wednesday, shrugging
off Aetna's results.
 Aetna's net income rose to $437.8 million, or 95 cents per
share, from $431.6 million, or 85 cents per share, a year
 Excluding items, earnings of 96 cents a share were 3 cents
ahead of the average forecast of analysts, according to Reuters
 Revenue rose 11 percent to $8.61 billion. The health
insurer's enrollment grew 9 percent, to 19.1 million at the end
of March.
 Aetna Chief Financial Officer Joseph Zubretsky called it a
"very, very good quarter," pointing to the membership growth as
well as an 8 percent increase in operating earnings.
 "Even with the uptick in commercial medical costs, on
balance this was a very, very good result that we believe is
creating attractive shareholder returns," Zubretsky said in an
 In the commercial segment that serves employers, the medical
benefit ratio, which measures the amount of premiums spent on
medical costs, worsened to 81.7 percent from 79.8 percent a year
earlier. Aetna previously projected the ratio at between 80.2
percent and 80.8 percent for the year.
 More people than expected are using COBRA post-employment
insurance, Aetna said. Because such coverage is so expensive,
people tend to buy it only if they are likely to use medical
services. Others who worry about their jobs are using services
in anticipation of losing coverage, Aetna said.
 The company further said people are using more services,
such as getting more tests, when they visit the doctor. Doctors
are also billing for all revenue they are contractually entitled
to, Zubretsky said.
 "We believe this distressed economy is creating membership
and provider behavior changes," Zubretsky said.
 In addition, the Hartford, Connecticut-based company said it
took more reserves to cover medical costs from prior quarters.
 Wachovia analyst Matt Perry said Aetna's first-quarter
results were the weakest in the industry so far, but added that
it has been the best-run health insurer and did not see problems
that rivals endured in 2008.
 Aetna still expects 2009 operating earnings of $3.85 to
$3.95 per share.
 To adjust to the higher medical costs, Aetna plans to
re-price business for the remainder of the year and take a
closer look at its methods for managing medical costs.
 Improved performance in its Medicare plans for seniors,
administrative cost controls, higher expected investment income
and share buybacks also will allow Aetna to reach its full-year
forecast, Zubretsky said.
 Aetna shares were down $2.27 or 9.3 percent at $22.13 on the
New York Stock Exchange around midday. Through Tuesday, the
stock was down 14 percent this year, compared with a 7 percent
drop for the S&P Managed Health Care index .GSPHMO.
 (Reporting by Lewis Krauskopf; Editing by Lisa Von Ahn and
Matthew Lewis)

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