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By MATTHEW STURDEVANT, email@example.com
The Hartford Courant
9:01 PM EDT, April 26, 2012
Aetna reported earnings below analysts' expectations Thursday morning as the company paid more in medical costs and administrative expenses.
Net income decreased 13 percent to $511 million, or $1.43 per share, from $586 million, or $1.50 per share, during the same period a year before.
During the economic slowdown, medical costs were lower as people generally held back on out-of-pocket spending. That trend appears to be changing, at least according to Aetna's results.
In addition, health insurers are now required as a result of federal health-care reform to spend a minimum amount of premium dollars on customers' medical expenses — 85 cents of each dollar for large-group health plans and 80 cents of each dollar on individual and small-group plans.
Operating earnings dropped 15 percent to $477.4 million, or $1.34 per share, for the first three months of the year, down from $560.2 million, or $1.14 per share, during the same period last year.
Analysts' average estimate for earnings was six cents higher, $1.40 per share, according to Thomson Reuters.
The company spent more of each premium dollar on medical expenses during the quarter compared with the same period a year before. Known in the industry as medical-loss ratio, or medical-benefit ratio, health insurers report the percentage of premium dollars spent on medical care for customers.
In the commercial accounts, which is health insurance sold to employers to provide to workers, the medical-loss ratio increased to 80 percent from 77 percent. In the Medicare business, Aetna's ratio decreased to 84 percent from 85 percent. In the Medicaid business, the company's ratio increased to 92 percent from 88 percent.
Health care costs increased 10 percent to $5.86 billion during the quarter compared with $5.35 billion a year ago. General and administrative expenses increased 8 percent to $1.38 billion for the quarter from $1.27 billion a year before.
The number of Aetna members with medical insurance fell by 544,000 to 17.9 million, reflecting in part the company's exit from the Connecticut Medicaid market. But revenue from premiums increased 6 percent to $7.19 billion during the quarter from $6.75 billion during the same period a year before.
"We're balancing growth and profitability, and are confident of our ability to increase membership over the course of this year to 18.2 million medical members," said Mark T. Bertolini, the Aetna chairman and CEO.
Goldman Sachs analyst Matthew Borsch wrote in a research note that a lack of benefit from prior-period reserves was a specific factor holding back quarterly results.
"Our broader view is that the (first quarter) results show the now more constrained margin environment as near-cycle peak margins and industry adaptation to the health reform MLR (medical-loss ratio) rules fuel price competition and medical cost trend is no longer an offsetting tail wind," Borsch wrote.
Shares of Aetna fell by $4.05 to $45.31 on the New York Stock Exchange Thursday.