business

By Dinah Wisenberg Brin
Of DOW JONES NEWSWIRES


Aetna Inc.'s (AET) lowering of its 2009 earnings forecast has raised questions about whether the pressures that hobbled its managed-care peers a year ago - and caused them to repeatedly cut their guidance - are finally catching up with the Hartford, Conn., company.

The news has left some wondering if Aetna isn't done reducing its outlook amid lingering concerns that the company has priced its commercial plans too low relative to medical costs.

"We are concerned that industrywide margin pressure that hit most of the sector in 2008 has caught up with Aetna in 2009," Wachovia analyst Matt Perry said in downgrading the company to market perform.

Perry added that last year the average reduction in projected per-share earnings was 34% and that most companies cut their views more than once. Aetna on Tuesday lowered the midpoint of its per-share earnings guidance, given in February, by 7%.

"Both of these data points leave us concerned that [Aetna] could cut EPS again in 2009," the analyst said. Goldman Sachs analyst Matthew Borsch, who has rated Aetna at sell for the past year and also sees further forecast cuts as a possibility, blames aggressive pricing.

"We continue to see pricing as the chief culprit here," he said. "We argue the red flags for lower earnings have been evident for some time as Aetna maintained its view of cycle-peak margins in the face of industrywide deterioration last year and as Aetna has continued to show strong sector-relative market share gains in the price-sensitive commercial risk segment."

Aetna maintains it aims to price its health plans in line with increases in medical costs and will continue to do so.

"The tradeoff between growth and profitability is not one that we're willing to make," Chief Financial Officer Joseph Zubretesky said on a conference call. "If we have to sacrifice membership growth for [next year] in order to price to our new medical [cost] trend, we will do that."

Aetna late Tuesday reduced its outlook for per-share operating earnings to between $3.55 and $3.70, from a previous range of $3.85 to $3.95, citing ongoing increases in medical costs in its commercial health plans and lower-than-expected Medicare revenue.

The company said it is continuing to see a higher level and number of services applied on a per-patient basis at hospitals, linking the phenomenon to the weak economy.

Wachovia's Perry said Aetna had the weakest results in the first quarter of this year and was the only company to cite unexpectedly high medical costs, while last year it was the only company not to significantly lower guidance and had higher margins than its peers.

For most of 2008, Aetna maintained its earnings forecast and expanded its lucrative commercial health-plan enrollment as its managed-care competitors struggled with pricing, medical costs, membership and profits.

Since then, Aetna's peers have tried to correct their pricing in response to their margin troubles last year. As a result, Borsch - like others - sees Aetna's current commercial margin pressure as company-specific.

Meanwhile, Citigroup's Charles Boorady believes the managed-care industry as a whole is indeed facing higher cost increases as providers seek to offset effects of the weak economy, but that Aetna is less reserved for it than its peers.

These concerns are reflected in Aetna's stock price. Aetna shares recently traded at $25.90, down 5% Wednesday, and is the only one of the top four managed-care companies showing a decline in its stock price year to date.

A year ago, the stock traded at a premium to its peer group, as measured in price to earnings for the next 12 months, although on average Aetna has traded in the middle of the pack for the past five-plus years.

Now, Aetna trades at roughly seven times projected earnings, a discount to larger competitors UnitedHealth Group Inc. (UNH) and WellPoint Inc. (WLP), which trade at more than eight times, although still a premium to Cigna Corp. (CI), the fourth-largest player, which trades at 5.8 times.

Overall, Borsch sees 2009 as marking a pause in an industry margin down cycle, although the sector is unlikely to outperform the market from here.

source: The Wall Street Journal

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