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Aetna Cuts Forecast as Medical Costs Erode Premiums

Posted on 27 Jul 2009

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The third-largest U.S. health insurer, Aetna Inc., cut its full-year earnings forecast for the second time in two months as rising medical costs eroded revenue gains from selling lower-priced policies.

Aetna fell $1.69, or 6.4 percent, to $24.75 in New York Stock Exchange composite trading at 9:31 a.m. Aetna’s net income for the second quarter declined 28 percent from a year earlier, the Hartford, Connecticut-based insurer reported today. The results, after adjustment for pension costs and a legal settlement, missed analysts’ estimates by 10 cents a share.

Chairman and Chief Executive Officer Ronald Williams said in a statement that medical costs were “not fully captured in 2009 pricing.” In June, Aetna said the recession was raising expenses by spurring workers to use benefits before they lose their jobs. U.S. unemployment has continued to mount, last month hitting 9.5 percent, the highest in 26 years.

“It is tempting to conclude that the cut to earnings outlook is the ‘last shoe’ to drop, representing a lower earnings level from which Aetna will begin to recover,” said Matthew Borsch, a Goldman Sachs Group Inc. analyst in New York, in a note to clients. “However, it’s worth noting the company still showed growth” in commercial accounts where it had priced most aggressively, Borsch wrote.

Uncertainty that health-care legislation in Washington will benefit the industry has weighed down managed-care shares, said Carl McDonald, an Oppenheimer & Co. analyst in New York, in a July 25 report. The guidance cut may help Aetna in the end by “removing the major overhang” that had pushed the insurer’s stock price lower, in relation to earnings, than are the share values of some of its rivals.

Forecast Cut

With today’s statement, the company has shaved its full-year forecast by more than $1 since February. Aetna said it expects 2009 earnings of $2.75 to $2.90 a share, compared with $3.55 to $3.70 given June 2.

“We continued to see upward pressure on medical costs beyond what we projected in early June,” Williams, the CEO, said in today’s statement. “This is disappointing, but it can be fixed.”

The Wall Street Journal reported late yesterday that Aetna was considering a sale of its pharmacy benefits unit. The company didn’t mention the possibility in its statement and a company spokesman, Fred Laberge declined to comment in a telephone interview.