Aetna Posts Higher Profit With the Affordable Care Act

TheStreet.com

NEW YORK (TheStreet) -- Early this morning, Aetna reported earnings that topped expectations.

The release came less than a month after Aetna's stock hit an all-time high. The Affordable Care Act should get some of the credit.

That's because the ACA encouraged the creation of Accountable Care Organizations, a term explained here by Kaiser Health News. ACOs are networks that share responsibility for patient care and get a chance to share in the savings if patients stay well.

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Aetna first got into the ACO business in a big way by buying Coventry Health, a major ACO provider under Medicare, for $5.7 billion in 2012. It's now trying to sell the workers' comp part of that business, but as Joe Paduda of Health Strategy Associates notes, it's not because the model is broken but because Aetna lacked control over costs in that part of the business.

TheStreet's Julia Sun has details has details on Aetna's Q2 results:


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An ACO is about cost control, about sharing data to manage patients' health rather than waiting for serious illness to strike. The idea was controversial and was at the heart of the political attack that the law would get between "a patient and their doctor." But it seems to be working for insurers by helping to control costs and maintain customers' health.

On Tuesday morning, shares of Aetna were trading at $82.61, down 2.6%, after the company reported a 2.4% increase in second-quarter earnings and raised its outlook for the full year.

Now Aetna appears to be doubling down on the ACO model. It signed a deal this week with Geisinger Health Systems in Pennsylvania to give all Aetna members in-network access to Geisinger's hospitals. Geisinger has been working on ACO implementation for several years.

Aetna has also formed an ACO with University Hospitals in Ohio, the fifth ACO that Aetna has formed in that state alone.

Under the University Hospitals plan, the insurer and the hospital system exchange patient data in order to identify gaps in care and to control costs. The exchange helps Aetna push patients toward preventive care, improve management of chronic conditions such as diabetes to keep people out of hospitals and better coordinate primary care to keep people from being readmitted into hospitals or taken to emergency rooms.

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The result are lower costs for those who are insured and higher profits for the insurance company, which shares in the savings. Thanks to greater use of ACOs, the Medicare trustees now say the program's benefits are financially secure through 2030, six years longer than previously assumed.

Aetna is not the only insurer that is benefiting from early results on ACOs. I wrote last year that other insurers, such as UnitedHealth Group , are seeing similar trends. The roof hasn't caved in for the sector. On the contrary, shares of all the major publicly traded players in the health-insurance sector are up by double-digits so far this year, with Aetna shares rising over 20%.

As more people are brought into ACOs, either through policies bought on the exchanges or through employer plans, the shared savings of Medicare should filter down into the general market, and companies that got on the ACO bandwagon, such as Aetna, should continue to do well.

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At the time of publication, the author owned no shares in companies mentioned in this story. 

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates AETNA INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate AETNA INC (AET) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and attractive valuation levels. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 16.0%. Since the same quarter one year prior, revenues rose by 46.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 28.27% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, AET should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • AETNA INC has improved earnings per share by 23.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, AETNA INC increased its bottom line by earning $5.35 versus $4.78 in the prior year. This year, the market expects an improvement in earnings ($6.53 versus $5.35).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Health Care Providers & Services industry. The net income increased by 35.8% when compared to the same quarter one year prior, rising from $490.10 million to $665.50 million.

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