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Aetna (AET) Hurt by Exchange Business, High Medical Costs

Zacks Equity Research

Shares of health insurer Aetna Inc. AET underperformed over the past one year. While the stock returned 17.7%, the Zacks categorized  Medical - Health Maintenance Organization industry gained 24.3%.

The underperformance is likely to have resulted from a number of issues bothering the company of late. Its merger with Humana Inc. HUM was ripped apart recently on regulatory concerns. The deal would have positioned Aetna as a major Medicare provider – a market coveted by all other players in the industry.

Aetna has been troubled by its public exchange business. After incurring loss on public exchanges in 2015, Aetna bore a pre-tax operating losses of $450 in 2016. Lackluster results from this line of business prompted the company to substantially reduce its risk exposure to these products for 2017. Based on its current view of open enrollment, the company projects that its first-quarter Individual Commercial membership will decline to 240,000 from approximately 965,000 at year-end 2016. The company also projects losses on its Individual Commercial ACA-compliant products in 2017.

Aetna’s membership has also been under pressure. The company ended 2016 with medical membership of 23.1 million, down from 23.49 million in 2015. It is witnessing continued pressure in membership growth in the middle market and small group businesses due to its previous pricing actions to improve margins. The company  expects 22.2 to 22.3 million medical members in the first quarter of 2017.

Aetna is also facedwith an increase in medical benefit ratio (MBR), which measures medical cost as a percentage of premium revenues. Total MBR for full-year 2016 was 81.8%, up from 80.8% in 2015. The increase was driven by an unfavorable performance in individual Commercial products and lower favorable development of prior-period healthcare cost estimates for Government business. The company projects full-year 2017 total Health Care Medical Benefit Ratio in the range of 84% to 85%, representing an increase of 270 basis points year over year at the midpoint of the range.

Despite these challenges, we believe the company will achieve long-term growth on the back of its strongly performing government business, cost control measures, growing accountable care organization initiative, expanding international markets and a strong capital position.

Aetna carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the medical space are UnitedHealth Group, Inc. UNH and Inogen Inc. INGN. While Inogen sports a Zacks Rank #1 (Strong Buy), UnitedHealth holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen beat earnings estimates in three of the last four quarters with an average positive surprise of 49.08%.

UnitedHealth beat earnings estimates in each of the last four quarters with an average positive surprise of 3.80%.

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