January 29, 2020 / 11:20 AM / 21 days ago

Anthem's growing, low-margin government business to hurt medical costs

(Reuters) - Anthem Inc (ANTM.N) on Wednesday warned medical costs in 2020 would be higher than market expectations as low-margin, government-backed health plans become a bigger portion of its business, sending the U.S. insurer’s shares down about 6%.

FILE PHOTO: The office building of health insurer Anthem is seen in Los Angeles, California February 5, 2015. REUTERS/Gus Ruelas

The company said the unit, which contributed slightly more than 60% to its revenue in 2018 and 2019, is pulling up the overall costs.

The forecast also partly reflects the return of the health insurance fee, said Chief Financial Officer John Gallina on a post-earnings call.

The industry-wide fee of about 2.5% to 3% of premiums collected was created to help fund former President Barack Obama’s signature Affordable Care Act. It is set to be repealed in 2021.

Many insurers collect the fee in customer premiums the year before they pay the government, so its repeal next year will lower how much premium Anthem collects this year.

Anthem said a sooner-than-expected onset of flu season led to more claims in the fourth quarter. Earlier this month, larger rival UnitedHealth Group Inc (UNH.N) reported higher medical costs, but played down concerns of an impact from the flu season.

Anthem said it expects adjusted profit to be above $22.30 per share, compared with the consensus estimate of $22.71 per share.

“We view the company’s initial 2020 guidance as a bit soft,” Cantor Fitzgerald analyst Steven Halper said, adding that the forecast for medical costs appear to impact its earnings outlook.

Anthem’s benefit expense ratio, a measure of the share of premiums paid for medical services, is expected to be in the range of 85.3% to 86.3%.

This is worse than the consensus estimate of 84.8%, according to Refinitiv IBES estimates. A lower medical expense ratio is better for health insurers.

For the reported quarter, the ratio, which reflects both premiums collected and the costs of customer medical claims, worsened to 89% from 86.8% a year earlier, missing estimates of 87.91%.

Anthem posted quarterly total operating revenue of $27.13 billion, narrowly beating estimates of $27.10 billion, benefiting from higher sales from IngenioRx, the pharmacy benefits unit that it launched last year ahead of schedule.

Excluding items, Anthem earned $3.88 per share, in line with estimates.

Shares of the Indianapolis, Indiana-based company were down at $274.4.

Reporting by Manojna Maddipatla and Tamara Mathias in Bengaluru and Caroline Humer in New York; Editing by Bernard Orr and Arun Koyyur

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