Aetna Second-Quarter Profit Drops 28% on Higher Medical Costs in Commercial Health Plans

Net income fell to $346.7 million from $480.5 million the same period a year ago, and included $13.2 million in net realized capital gains.

Operating earnings declined even further, 34%, which Aetna blamed on significantly higher medical costs in its commercial health plans and unfavorable reserve development, mostly from 2008. These factors resulted in a lower underwriting profit in its health insurance business, Aetna said.

"Aetna finally decided it was time to take its medicine," wrote Carl McDonald, an equity analyst with Oppenheimer & Co., wrote in a research note.

Its revised 2009 earnings per share outlook of $2.75-2.90 is a bit lower than the $3 figure most were looking for, "which may put some pressure on the stock this morning, but the stock probably won't stay down for long, because it feels like Aetna has finally lowered its earnings base enough, and the company is assuming the higher cost trends persist through the balance of the year," McDonald wrote.

The higher-than-projected medical costs weren't captured in 2009 pricing, which resulted in a higher commercial medical benefit ratio of 85.9, Aetna said. The MBR is a closely watched measure of health care expenses as a percentage of premium revenue.

The MBR included $65 million in unfavorable development of the prior-period health care cost estimates. Excluding the development, the commercial MBR was 84.6, which Aetna blamed on medical cost increases that were higher than its premium increases.

"Our second-quarter results do not meet our expectations or the standards we have established over several years of strong operational execution and financial performance,? said Ronald A. Williams, Aetna's chairman and chief executive officer, in a statement. ?We continue to see upward pressure on medical costs beyond what we projected in early June, which we believe is driven in part by changing provider behavior in the face of a deep recession."

"We did not fully capture the impact of these forces in our 2009 pricing," Williams said.

Aetna said it's taking actions to address the higher costs, including pricing actions, better medical management and provider contracting.

The company was originally scheduled to report earnings July 29 but issued statement on Sunday, July 26 saying it would release them early. It didn't provide a reason for the change.

The increases in commercial medical costs "are largely the result of continued higher claim intensity, such as services rendered in a higher cost setting and more tests and procedures per visit, resulting in higher costs for emergency room, ambulatory, laboratory and preventive services," said Mark Bertolini, president of Aetna, in a statement.

Total medical membership increased to 19 million from 17.7 million in last-year's second quarter.

Total revenue rose 10% to $8.6 billion, which Aetna attributed to an 11% increase in premium revenue and an 7% increase in fees and other revenue, reflecting the higher enrollment and premium increases.

On the morning of July 27, Aetna's stock was trading at $25.35 a share, down 4.12% from the previous close.

Aetna Health subsidiaries currently have Best's Financial Strength Ratings ranging from A to A- (Excellent).