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Originally published October 29, 2009 at 4:10 AM | Page modified October 29, 2009 at 3:46 PM

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Aetna says 3Q profit grows, cost controls improve

Managed care company Aetna Inc. heads into the final quarter of 2009 fighting swine flu and rising unemployment like the other major health insurers.

AP Business Writer

INDIANAPOLIS —

Managed care company Aetna Inc. heads into the final quarter of 2009 fighting swine flu and rising unemployment like the other major health insurers.

But the Hartford, Conn.-based insurer's third-quarter profit grew 18 percent, and company leaders said Thursday they finally have a handle on rising medical costs that hurt performance the past couple quarters.

Investors sent the insurer's stock price climbing more than 7 percent, or $1.88, to $27.20 after the company announced earnings.

"Ultimately (cost controls) should lead to more stable-to-potentially growing earnings in 2010," Edward Jones analyst Steve Shubitz said.

Medical costs still climbed faster than expected in the third quarter, and that helped chop Aetna's operating earnings 43 percent. CEO Ronald A. Williams said the quarter's results don't reflect "decisive actions" Aetna is taking to corral costs, including improvements to pricing and contracts with providers.

"The pricing that we put in place for 2009 turned out to not really be what we needed to achieve the results and margins that we had historically been delivering," Williams said.

Aetna, the third largest publicly traded managed care company, said it started seeing an increase in billing "intensity" late last year. It said care providers began boosting the amount of work they do on patients per diagnosis, possibly in an attempt to squeeze more revenue out of insurers.

"Clearly it was awfully coincidental with the downturn in the economy, so we attribute it to the economy as much as anything else," Chief Financial Officer Joe Zubretsky said.

Aetna's commercial medical benefit ratio, which measures the percentage of premiums paid to cover medical claims, swelled to a higher-than-expected 85.6 percent in the third quarter from 80.3 percent a year ago.

But Zubretsky said that will improve next year. Aetna's commercial segment includes employer-sponsored group coverage and individual policies and brings in most of the insurer's revenue.

Aetna said that ratio rose mainly due to flu-related expenses and coverage of people who continue their employer-sponsored insurance coverage under the federal law known as COBRA.

COBRA customers are generally money-losers for health insurers because they generate more in medical claims than the insurer receives in premium revenue.

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The insurer also expects to lose as many as 650,000 members this year mainly due to job cuts by employers that have its group health insurance.

"It's rather frustrating, but it's a fact of life," Zubretsky said. "You have an account that's enjoying your services, it's priced well, it's meeting all of it's objectives. But if they shed 5-to-7 percent of their payroll, that's lost members and lost revenue and profit."

Even so, Aetna expects to end the year with medical enrollment of about 18.8 million people. That would be a drop from the start of 2009 but a 6 percent increase from 2008.

Membership has slumped throughout the health insurance sector as employers cut jobs, reducing the number of people covered under employer-sponsored plans. Aetna rivals UnitedHealth Group Inc. and WellPoint Inc. both recently said they saw enrollment declines in the third quarter.

Aetna boosted its enrollment because it didn't raise insurance prices for 2009 like competitors UnitedHealth and WellPoint did, Shubitz said. That helped the insurer gain members, but it hurt when costs came in higher than expected.

Overall, Aetna earned $326.2 million, or 73 cents per share, in the third quarter. That represents an increase from $277.3 million, or 58 cents per share, in the same quarter last year, when Aetna said it incurred heavy capital losses in "then-deteriorating global economic conditions."

Revenue grew 9 percent to $8.7 billion.

Operating earnings, which exclude capital gains and other items, fell to $308.2 million, or 69 cents per share.

The results topped Wall Street expectations. But Wells Fargo analyst Matt Perry called the insurer's performance weaker than other diversified managed care companies.

"Until we see more evidence that margins are stabilizing or improving, we prefer companies whose margins seem to have already bottomed," Perry wrote in a research note.

The insurer said it expects full-year operating earnings per share of $2.75, at the bottom end of its previous forecast of $2.75 to $2.90 per share. Analysts expect $2.86 per share.

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AP Business Writer Damian Troise contributed to this story from New York.

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