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WIKI ANALYSIS
Aetna Inc. (NYSE: AET) is the third largest diversified healthcare provider, serving over 36.5 million people in the United States.[1] [2] Based in Hartford, Connecticut, Aetna sells a wide range of health and life insurance products categorized as health, dental, pharmacy, group life, disability, and long-term care. In FY2008, 93% of Aetna's revenue came from its sale of Health Care, both on a private and employer-funded basis; however as unemployment rises, Health Care and other insurance plans suffer from membership attrition, thereby reducing total revenue.[3].
Aetna's greatest challenge has been to maintain a profitable membership in light of increasing unemployment and rumors of U.S. health care reform.[4] However, troubles related to membership are not new and precede the 2008 crisis, with membership growth down by 65% between 2007 and 2008 despite an acquisitions campaign.[3]
Similarly, though Aetna's revenue grew by by $3.8 billion in FY 2008 as a result of increased premium rates, Aetna's capital has dropped by approximately $480 million in FY 2008 as credit lines were hit by deteriorating global economic conditions and as debt securities lost value.[3] Failing debt securities accounted for nearly a fourth of this loss.[3] The greatest challenges facing Aetna at the moment are the task of continuing to profitably expand membership, its losses related to debt, and uncertainty regarding government involvement in health care.
Business Overview
Aetna sells health insurance to over 36.5 million people in the United States, making it the third largest national healthcare provider.[3] 78% of Aetna's revenue comes from the health care premiums it charges its customers.[5] The remainder comes from pension management fees and from investment income.[5] Aetna operates its business in three markets: health care, life insurance, and large case pensions.[5] In 2007, AET acquired Schaller Anderson and Goodhealth Worldwide in an effort to expand its Health Care product line.[6][7] Aetna's revenue increased by $3.4 billion in 2008 and $2.5 billion in 2007 as a result of these acquisitions and increased premium rates.[3]
Business Financials
Aetna's revenue has grown by 23% from FY 2006 to FY 2008, with a 12% increase between 2007 and 2008.[3] This growth in revenue is a result of acquiring Broadspire Disability, Schaller Anderson, Incorporated, and Goodhealth Worldwide (Bermuda) Limited[8], but also a result of increased premium rates first initiated in 2007.[3] Operating expenses, on the other hand, increased by 14% between 2007 and 2008 as a result of the costs of integrating these acquisitions.[9]. Additionally, Aetna's net realized capital has decreased with these acquisitions from $24.1 million in FY 2006, to a loss of $47.9 million in FY 2007, to a $482 million loss in FY 2008.[10][3] The 2008 economic downturn strained credit lines, thereby contributing to the 2008 25% drop in net income.
| Income Statement for FY 2006-2008 (Dollars in millions) | |||
| [10][3] | 2006 | 2007 | 2008 |
|---|---|---|---|
| Revenue | $25,145.7 | $27,599.6 | $30,950.7 |
| Income from Continuing Operations | 1685.6 | 1831.0 | 1384.1 |
| Net Income | 1701.7 | 1831.0 | 1384.1 |
| Net realized capital (losses) gains | 24.1 | (47.9) | (655.9) |
| Assets | 47,626.4 | 50,724.7 | 35,852.5 |
In the third quarter of 2009, Aetna’s revenues increased by 9% and its net income increased 18% over the third quarter of 2008, primarily as a result of improved performance in Aetna’s investment portfolio. Medical benefit ratios (medical costs divided by revenues) in its Health Care line increased over the same period from 80.9% to 85.6%, mainly due to unexpected costs related to the H1N1 flu and higher COBRA participation, while membership numbers also declined. .[11] In response to the rising healthcare costs, Aetna announced plans to raise its prices on commercial health plans.[12]
Business Segments
Aetna conducts its business in three areas: health care, group insurance, and large case pensions. Each segment is distinct and offers separate products and services.[5]
- Health Care: The Health Care segment offers medical, dental and vision plans, and pharmacy benefits management offered on both an Insured basis and an employer-funded basis. Health Care also provides Medicare and Medicaid services and products.[5]
- Group Insurance: The Group Insurance segment covers group life insurance products, including basic group term life insurance, voluntary or supplemental programs, group universal life, and accidental death and dismemberment coverage.[5]
- Large Case Pensions: The Large Case Pensions segment covers retirement products for tax qualified pension plans.[5]
Most of Aetna’s 19 million medical members are privately insured, while government-run Medicare and Medicaid do not represent a large part of Aetna’s business portfolio. As of September 2009 Aetna’s medical membership was concentrated mainly in large (over 50 members) employer health plans (85%), followed by small employer plans (6%), Medicaid (5%), Medicare (2%), and individual plans (2%). [14]
Divestiture of Pharmacy Benefit Management Segment
According to the Wall Street Journal, Aetna is shopping its 11.2 million member pharmacy benefit management (PBM) segment, with potential buyers including CVS Caremark Corporation and MedcoHealth Solutions.[15] PBM's administer prescription drug benefits for employers and health plans through mail-order pharmacies. Analysts have speculated that PBM divestitures will rise due to the fact that Wall Street tends to value independent PBMs more highly than PBMs owned by large health insurance corporations.[16] In April 2009, Express Scripts acquired competitor Wellpoint's PBM business for $4.7 billion.[17] A report released by Citi Investment Research valued Aetna's PBM business at $2.2 billion.[18]
Trends and Forces
Healthcare reform will impact many aspects Aetna's business
Potential healthcare reforms vetted by the Obama Administration and currently under review in Congress have the potential to alter the structure of the American health-care system. Aetna stands to gain as well as to lose from different segments of the new healthcare reform proposals. Plans to expand access, such as a proposed expansion of Medicaid to tens of millions of currently uninsured Americans would drive revenue growth for Aetna. On the other hand, increased taxes and publicly-driven competition in the health insurance market would hurt Aetna's bottom line. Yet with political negotiations still underway, at the moment there can only be speculation regarding the final form that healthcare reforms will take.
One healthcare reform proposal that has received a lot of attention is the idea of introducing a government-run insurance program. Such a program would grab market share from private insurance companies, thus hurting the bottom line of companies such as Aetna. However, this proposal has received criticism from Republicans as well as some moderate Democrats, and in December 2009 the Senate passed a healthcare bill without a public option in a 60-39 vote.
Another hot-topic issue involves the question of whether the government will tax health care benefits provided by employers.[19] Such a tax would likely decrease health insurer margins.
Aetna would stand to benefit, however, from the expansion of Medicaid to the tens of millions uninsured Americans. Aetna’s Medicaid services program enrolls almost one million members.[20]
Rising Unemployment in 2008-2009 has led to a Decrease in Health Care Enrollment with Subsequent Losses in Membership.
The 2008 economic crisis has impacted unemployment rates in both 2008 and 2009, with unemployment rates reaching a high of 8.5%-- the highest it has been in a quarter-century.[21] As unemployment increases, laid off workers lose access to employer-based health care. This subsequent decrease in health care expenditure impacts health care providers and the health care industry at large by decreasing their membership.[22] As a result, Aetna has seen a decrease in growth in net income and operating earnings, especially in its Health Care market. Net income fell by 33% in FY 2008 and Health Care saw a 6% decrease in earnings growth.[3] Such losses are amplified by the fact that Aetna relies heavily on its Health Care market, with 93% of Aetna's revenue coming from this business segment. This pattern of operational decline is directly correlated with decreasing employment levels in the U.S..[23]
Rising healthcare costs put pressure on earnings
Rising healthcare cost is a major concern for health insurance companies, and trends show healthcare costs for U.S. businesses rising 9% in 2010. These rising medical costs combine with the recession and increased unemployment to create a "tug-of-war" between the need to raise premiums and the downtrend on enrollment and willingness of consumers and business to pay high premiums.[24] These competing pressures are having the overall effect of lowering Aetna's revenues and margins. Aetna's ability to mitigate the negative effects of rising healthcare and unemployment will be critical to it's ability to maintain strong earnings and compete in the health insurance industry.
Strained Credit Lines Have Hit Debt Securities Impacting Aetna's Income and Capital Values.
The 2008 economic crisis resulted in strained credit lines across many industries, leading to numerous debt-related problems for many companies. Aetna incurred a loss of $482 million caused primarily by losses associated with its debt-securities.[3] As the recession in the United States deepens, speculation over debt payment has led to further economic losses and market volatility.[25] The value of Aetna's holdings decreased by $1.1 billion between 2007 and 2008.[26] Though a problem across the entire industry, Aetna still has $14 billion in debt and other related security holdings that are at risk for future losses.[27]
Competition
Aetna differentiates itself from other players in the industry by offering improved communications to customers, especially those purchasing employer-based health care. [28] Aetna offers information management services to its customers in all areas, especially in the Health Care market.
Aetna's Main Competitors
- UnitedHealth Group (UNH)-- UnitedHealth Group is a diversified health care company that operates in four segments: Health Care Services, OptumHealth, Ingenix and Prescription Solutions.[29]
- CIGNA Corporation (CI)-- CIGNA is an investor-owned health care company based in the U.S. and operates in five business segments: HealthCare; Disability and Life; International; Run-off Reinsurance, and Other Operations.[30]
- WellPoint Health Networks (WLP)-- WellPoint is a health benefits company that is licensed by the Blue Cross and Blue Shield Association. [31]
| Primary Competitors | |||
| 2008 Total Revenue (In millions) | % Revenue Growth in 2008 | 2008 Net Profit Margin | |
|---|---|---|---|
| Aetna[3] | $30,950.7 | 12% | 4.47% |
| UnitedHealth Group Inc.[29] | $81,186 | 7.6% | 3.67% |
| Cigna Corporation [30] | $19,101 | 8.4% | 1.53% |
| WellPoint [31] | $61,251 | 0.14% | 4.1% |
Italic text
References
- ↑ AET 2009 10-K; Part 1: Business, Page 1
- ↑ AET Google Finance Profile
- ↑ 3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11 3.12 3.13 3.14 AET 2008 10-K; Overview, Page 2
- ↑ Shares Rise on Aetna Acquisition Rumor
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 AET 2007 Financial Annual Report; Consolidated Statements of Income, Page 41
- ↑ Aetna Completes Acquisition of Goodhealth Worldwide
- ↑ Aetna Completes Acquisition Of Schaller Anderson
- ↑ AET 2007 Financial Annual Report; Notes to Consolidated Financial Statements, Page 54
- ↑ AET 2008 Annual Report, Page 44
- ↑ 10.0 10.1 10.2
- ↑ [http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTg4Mzh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 Q3 2009 Earnings Release
- ↑ Aetna's Big Guidance Cut Offers Chance To Regain Confidence
- ↑ AET 2007 Financial Report; Selected Comments on Financial Data, Page 76
- ↑ [ http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzY0NDEyfENoaWxkSUQ9MzU4NzQwfFR5cGU9MQ==&t=1]
- ↑ Aetna Shops Its PBM Arm Amid Sector's Consolidation
- ↑ Five facts about pharmacy benefit managers
- ↑ Drug Benefit Unit in $4.7 Billion Deal
- ↑ Express Scripts buys PBM from WellPoint
- ↑ Raising taxes at center of health care reform debate
- ↑ Aetna Reports Second Quarter 2009 Results
- ↑ Unemployment Hits 8.5%; 663,000 More Jobs Lost
- ↑ Unemployment, Health Care Spending Affect Mortality
- ↑ Unemployment, Health Care Spending Affect Mortality
- ↑ Healthcare costs for U.S. companies seen rising 9 percent: survey
- ↑ U.S. Debt and Financial Crisis
- ↑ AET 2008 Annual Report; Selected Financial Data Page 58
- ↑ Global Financial Crisis: Collateralized Debt Obligations
- ↑ Aetna Launches New National Advertising Campaign
- ↑ 29.0 29.1 UNH Google Finance Profile Page
- ↑ 30.0 30.1 CI Google Finance Profile Page
- ↑ 31.0 31.1 WLP Google Finance Profile Page
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