Matt Coffina, a securities analyst at Morningstar, Inc., tells HPW that Aetna’s results indicate medical cost trends are stabilizing, which could presage acceleration of the trend in the future.

“It would be fair to attribute this to utilization, since MCOs generally have greater visibility into unit costs,” he says. “It doesn’t necessarily mean margins will contract in the near term, but it removes a tailwind that existed for the past couple of years.”

Aetna’s results were enough to shake its shares, which fell more than 8% at the market close on April 26. And analysts agreed that because the insurer didn’t raise its full-year guidance as has become the custom in the managed care sector, the results could foreshadow more modest results for insurers later in the year.

Are Aetna’s Results an Anomaly?

But Aetna’s results might be an anomaly. WellPoint, Inc. on April 25 bounced back from a disappointing fourth quarter to post first-quarter 2012 net income results that beat analyst expectations, and prompted it to raise its full-year earnings guidance. And Medicaid provider Centene Corp., already wounded earlier this month after Ohio dropped it as a Medicaid contractor for 2013, missed expectations, but raised its full-year projected earnings.

During an April 26 conference call with investors, Aetna CEO Mark Bertolini contended that the insurer’s performance in the quarter was not the result of missed calls on pricing or medical trend, which the insurer has pegged at 6.5%, plus or minus 0.5 percentage points.

“Quite frankly, we see nothing in utilization indicators one way or the other to predict that number is the wrong number and those are our pricing trends,” he said. “But everybody is sort of feeling for the bottom here where trends stop decelerating and starts to tick up.”

“What you’re really seeing right now is exactly what we call trend decelerating, the decelerating slowing, bottoming and then potentially upticking into 2012 as predicted to 6.5%,” added Aetna Chief Financial Officer Joseph Zubretsky.

The fact that Aetna did not release reserves set aside for prior years’ medical costs suggests that the insurer believes that while cost trends are rising, they are doing so within their previously forecasted range, Citigroup Global Markets analyst Carl McDonald wrote in an April 26 note to investors.

For the quarter, Aetna’s MLR of 81.5% was up 2.3 percentage points compared with the level a year earlier. Net income fell to $511 million ($1.43 per share), down from $586 million ($1.50 per share) in the first quarter of 2011. On the bright side, revenue climbed 6% to $8.86 billion. Total medical enrollment rose to 17,915,000, an increase of 121,000 from March 31, 2011, but a drop of 544,000 from the end of the year.

Aetna’s Results Contrast Other MCOs

Part of the reason Aetna’s results were particularly shocking is that they are in contrast to industry bellwether UnitedHealth Group’s sterling first-quarter results, which beat analyst expectations and included an increase in full-year earnings projections, despite a rise in medical costs (HPW 4/23/12, p. 3).

Here’s a look at the first-quarter results of other insurers:

• WellPoint: The Blues plan operator saw fourth-quarter 2011 earnings impacted by an adverse-selection issue in its Medicare Advantage regional PPO in northern California (HPW 1/30/12, p. 3). The company turned in a much better first quarter, even though its net income fell 8% compared with the prior year. WellPoint now expects 2012 earnings of at least $7.65 per share, up from a previous forecast of at least $7.60 per share. For the quarter, WellPoint reported net income of $856.5 million ($2.53 per share), a drop from the $926.6 million ($2.44 per share) it earned a year earlier. WellPoint said payments for medical claims totaled $11.8 billion in the quarter, an increase of 4.8%. Its MLR was 83.3%, an increase of 1.2 percentage points. Other insurers that have reported financial results so far this earnings season also noted an uptick in MLR. Overall medical enrollment dropped by 525,000 members compared with the prior-year period to 33.7 million on March 31. However, WellPoint Chief Financial Officer Wayne Deveydt said during an April 25 conference call that the insurer is positioning itself to add members, particular in its senior business.

“It’s important to recognize that we may choose to make even more investments this year that we think really drive long-term value for us,” he said. “And couple that with the investments we’re making in the duals [i.e., programs for beneficiaries who receive both Medicare and Medicaid] this year and the investments where the exchange is coming out.”

• Centene reported first-quarter earnings of $24 million (45 cents a share), below analysts’ expectations, compared with $23.7 million (46 cents a share) a year earlier. However, medical expenses weighed heavily on earnings, rising a whopping 47% as the insurer’s MLR rose 2.3 percentage points to 88.2%.Despite this, Centene is increasing its full-year earnings projection to a range of $2.64 to $2.84 a share, an increase of 4 cents. Total medical membership increased dramatically year over year, to 2,149,500 from 1,552,900, thanks in large part to the addition of 300,000 new members in Texas. In an April 25 note, McDonald wrote that Centene will benefit from additional membership growth mid-year.

“We all know new markets aren’t usually profitable initially, but in this case, Centene is adding new membership in Missouri and Washington, two states with existing managed care plans,” he said. “This means Centene will be adding members that are already managed, making it less likely there will be a lot of pent-up demand and an initial spike in utilization.”

© 2012 by Atlantic Information Services, Inc. All Rights Reserved.

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