In line with other large insurance companies, Aetna posted lower third-quarter profits -- "another solid performance" from a diversifying business model, as CEO Mark Bertolini said, but just shy of investor expectations.
In the first full quarter with all of the new subsidiary Coventry on the books, Aetna reported quarterly operating earnings of $561 million, up 7 percent from the third quarter of 2012, but down on a per share basis, from $1.55 last year to $1.50 this quarter.
That's from operating revenues that grew 49 percent over the last year to $12.3 billion in the third quarter, much of it from fully integrating Coventry, after acquiring it in August 2012 for $5.7 billion in cash and stock.
"Bolstered by the acquisition and continued strong performance in our commercial and Medicaid businesses," Bertolini said in a media release, "Aetna generated higher operating earnings and operating revenues year over year."
Especially with Coventry's Medicaid managed care contracts, Aetna is expanding its presence in the Medicaid market, while other business areas shift. For group insurance, with almost 19 million members, Aetna reported earnings of $19.7 million for the third quarter of 2013 -- down from $29.3 million last year, on revenue that actually increased from $531 million in third quarter 2012 to $577 million this year.
Aetna saw a medical cost ratio of 83.1 percent this quarter quarter across all its segments, with Medicare Advantage having the highest, 87 percent, followed by Medicaid, 84.9 percent, and commercial members, 80.5.
In a conference call, Bertolini and other Aetna executives said they were taking a prudent approach across the board, and not yet finalizing earning guidances given the "magnitude of uncertainties and challenges."
One of the biggest will be adapting to Medicare Advantage funding reductions. "We don't have it locked down in our operating plan," Bertolini said.
Another is the the health insurance fee, which between both Aetna and Coventry could be significant.
"We feel reasonably good about the fact that we've been able to include them in our conversations," Bertolini said, about incorporating the reinsurance fee into contracts. "Medicaid is probably the one we're most concerned about recovering the fee in."
Asked for thoughts on the uncertainty of the federal health insurance exchange and for more explanation of Aetna's public exchange strategy, Bertolini said he and others at the company have a few concerns.
Adverse selection could end up being a problem exacerbated by the website's poor launch, he said. "As they try the websites, the younger, healthier people aren't going to give them more than one shot."
"We worry about extended open enrollment and how long it goes," as well as potential delays to the individual mandate, as has been widely proposed. "Right now we don't believe it's all that strong," he said, referring to the $95 penalty in the first year.
But on the whole, with Aetna and Coventry selling individual plans in 31 states in and outside of exchanges, and in 10 public exchanges, Bertolini said it is an appropriate risk.
"It's a marketplace we think will be around for a long time," he said. "We'll see what happens in 2014, as we look to 2015."