Aetna Quarterly Profits Show Continuous Growth

By Matthew Radman,
Money and Investing Writer

The third-largest U.S. health insurer, Aetna (NYSE: AET), revealed expectation-beating profits in the last quarter of 2016 despite hardships.

Its proposed $34 billion merger with healthcare company Humana (NYSE: HUM) got blocked, and significant bleeding of profits has occurred due to the burden the Affordable Care Act. Aetna also faces a new conflict in the recent lawsuit filed against them for allegedly violating the Securities Exchange Act of 1934.

Aetna’s fourth quarter call to investors illustrated a rough year for the company. Profits were down significantly from $321 million to $139 million from a year previous. Its total revenue rose modestly from $15.73 billion to $15.86 billion.

It expected 2017 operating earnings of $8.55 per share, while investors were hoping for $8.79.  The company also saw lower margins as its medical benefit ratio, which describes what percentage of premiums get spent on claims, rose from 81.9 percent to 82.1 percent. The Affordable Care Act mandates insurers must use 80 cents of every dollar on claims.

Therefore Aetna still sees as healthy margins while remaining within the confines of the Act.

However, excluding items, it handily beat analyst estimates with earnings of $1.63 per share. Analysts had a target of $1.44 for the company.

The health company had a tricky 2016, losing $450 million on the Obamacare business. Aetna is not the only health company feeling the pressure, however. UnitedHealth Group (NYSE: UNH), as well as Humana, are other major health insurers are opting out of Obamacare plans due to much more expense than anticipated. These companies have reverted their initial support of the policies enacted by the Affordable Care Act partially due to an influx of unhealthy customers joining which cost too much to insure without raising premiums.

The kinks of Obamacare are still being worked out during a time where the Republicans in Washington are taking steps to dismantle the Act.

Another hiccup for Aetna is the blockage of its $34 billion deal with Humana. A federal judge earlier in January ruled that the combining of the two companies is not in the best interest of consumers. The decision was that a combined company would hold too much power, specifically in its Medicare business; which provides coverage for seniors. It is unknown if Aetna will file an appeal of the ruling.

However, a $1 billion breakup fee looms over Aetna’s head if it decides to abandon the deal. The merger agreement is set to expire on the February 15; Aetna executives mentioned in its fourth-quarter earnings call that it will “take all of that time.”As of February 3, Yahoo Finance reported on an alert from law firm Kessler Topaz Meltzer & Check, LLP has filed a class action lawsuit against Aetna on behalf of shareholders.

The law firm is alleging that the health company is in violation of the Securities Exchange Act of 1932 by  “Attempting to leverage Aetna’s participation in the Public Exchanges for favorable treatment from regulators regarding the Humana acquisition; threatening to limit its participation in public health insurance exchanges if the DOJ attempted to block the merger; not withdrawing from certain public health insurance exchanges for business reasons as Defendants claimed, but to follow through on its threat of leaving the marketplace once the DOJ filed suit and to improve its litigation position; withdrawing from public health insurance exchanges that were profitable for the Company; and as a result of the foregoing, Defendants’ statements about Aetna’s business, operations, and prospects were false and misleading and/or lacked a reasonable basis.”

Despite conflicts arising in 2016, Aetna was able to secure growth in earnings. The pending lawsuit is in early stages, and it will take time before seeing how Aetna, as well as investors, react to the allegations.

A version of this article appeared in the Tuesday, February 7th print edition.

Contact Matthew at
matthew.radman@student.shu.edu

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