Aetna's net profits plunged 28 percent in the second quarter as pricing of health plans failed to keep pace with rising medical costs. The company chopped its earnings forecast Monday for the second time in two months.

The Hartford-based insurer said that it will step up efforts to root out unnecessary medical tests and procedures, further trim administrative costs and raise prices as needed.

"Our 2009 [medical] trend is higher than we projected and our 2009 pricing was insufficient to cover these higher medical costs," Aetna CEO Ronald A. Williams told analysts on a conference call. "We are taking decisive yet thoughtful actions to put these execution challenges behind us and regain our momentum."

Although Aetna said it's realigning overhead costs because of lower projected earnings, company spokesman Fred Laberge said, "There are no job implications associated with today's announcement."

Aetna had 7,206 Connecticut employees at the end of March, and the number has remained nearly flat, he said. Aetna had 35,225 employees companywide at the end of June, little changed from 35,276 on March 31.

Rising medical costs are at the heart of the debates over health care reform. Aetna and other insurers say they can control costs better than a competing government health plan would do.

The company reported $346.6 million, or 77 cents a share, of net income for the second quarter, down from $480.5 million, or 97 cents a share, a year earlier.

Operating earnings, which exclude realized investment gains and losses and other items, were $308.5 million, or 68 cents a share, falling short of the Thomson Reuters analysts' consensus of 78 cents a share. Operating profit a year ago was $466.3 million, or 94 cents a share.

Aetna had to boost reserves for prior periods' claims by about $60 million because of higher medical costs than it projected. Claims are reflecting more expense per visit, such as more tests and other procedures, resulting in higher costs for emergency room, outpatient, lab and preventive services, the company said.


The company is increasing scrutiny of claims to determine whether all the services are appropriate and is adopting new reimbursement rules for second and third procedures that are done at the same visit, said company President Mark Bertolini. He promised "direct intervention" at certain hospitals to "ensure contract compliance."

Aetna lowered its forecast Monday for 2009 operating earnings to $2.75 to $2.90 a share, from its June estimate of $3.55 to $3.70.

Overall enrollment remained nearly flat at 19.05 million as of June 30, although commercial membership dropped by 64,000. Williams said that as Aetna raises prices to improve profit margins, "We would be willing to forgo membership growth if necessary to do so. We have a clear bias toward profitability over growth."

Aetna's stock closed down 72 cents, or 2.7 percent, at $25.72 a share Monday.

It will take Aetna several quarters to re-price its business, "and we believe that earnings-per-share risk remains heightened over the next quarter as medical claims from the second quarter further develop," said Matt Perry, health care services analyst at Wells Fargo Securities. "We do not expect much earnings per share growth in 2010."

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