Aetna (AET)

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Dan Sacks

Rashad Badr

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Aetna Inc. (NYSE: AET) is the third largest diversified healthcare provider, serving 35.3 million people in the United States and earning $34.2 billion in 2010 revenues.^{[1] [2]} Aetna sells a wide range of health and life insurance products categorized as health, dental, pharmacy, group life, disability, and long-term care. Aetna essentially sells protection from risk: as an insurer, is agrees to pay for a percentage of its customers' medical expenses in exchange for a fee, called the premium. The basic business plan is to offer clients a premium based on the the expected cost of caring for them, plus a markup for administrative costs and profit. Aetna's greatest challenge has been to maintain a profitable membership in light of increasing unemployment and U.S. health care reform.^[3]

Company Overview

Aetna sells health insurance to over 35.3 million people in the United States, making it the third largest national healthcare provider.^[4] Roughly 88% 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.^[6] Aetna operates its business in three markets: health care, life insurance, and large case pensions.^[6]

Business Financials and Operating Metrics

AET's Group Insurance Business includes group life, disability and long-term care products. Further, AET's Large Case Pensions business unit manages a variety of discontinued and other retirement and savings products.^[7]

FY2010 Earnings Summary

• Aetna’s revenues reached $34.2 billion, a 1.5% decrease over the previous year.
• Net income went up by 38.4% to $1.8 billion.

FY2011 Q1 Earnings Summary

• Net income rose to $586 million, or $1.50 per share, in the three months that ended March 31. That's up from $562.6 million.^[9]
• Revenue fell 3% to $8.38 billion.

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.^[6]

• 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.^[6]
• 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.^[6]
• Large Case Pensions: The Large Case Pensions segment covers retirement products for tax qualified pension plans.^[6]

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. Aetna’s medical membership is 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%). ^[11]

Key Trends and Forces

Healthcare reform will impact many aspects of Aetna's business

With President Obama signing into law the Patient Protection and Affordable Care Act, the much awaited and much debated health reform law came into place. Several of its provisions will affect Aetna and other insurers. The overall effect, however, remains to be seen.

The law includes a large number of health-related provisions to take effect over the next four years, including expanding Medicaid eligibility, subsidizing insurance premiums, providing incentives for businesses to provide health care benefits, prohibiting denial of coverage/claims based on pre-existing conditions, establishing health insurance exchanges, and support for medical research. The costs of these provisions are offset by a variety of taxes, fees, and cost-saving measures, such as new Medicare taxes for high-income brackets, taxes on indoor tanning, cuts to the Medicare Advantage program in favor of traditional Medicare, and fees on medical devices and pharmaceutical companies; there is also a tax penalty for citizens who do not obtain health insurance (unless they are exempt due to low income or other reasons).

The expansion of Medicaid together with the health insurance mandate and premium subsidies are projected to expand insurance to 32 million Americans without coverage. Aetna, as one of the the largest insurers as well as one of the largest Medicaid contractors, stands to benefit from this. ^[12]

The law will end the practices of refusing to cover patients with pre-existing conditions. This will likely lead to an increase in premium costs; however, given that the rule applies across the board, it may not hurt insurers’ competitive positioning. The mandate for employers to coverage for dependents of employees who don't have access to other employer-based health care coverage until the age of 26 is also likely to result in premium hikes. ^[13]

Cuts to Medicare Advantage program reimbursements may hurt Aetna, with its 440,000 MA enrollees, in the short term. In the long term, Aetna may lose out still more: as MA beneficiary premiums increase to reflect lower government reimbursements, Medicare patients may migrate to less profitable Prescription Drug Plans and opt to receive their medical benefits from the traditional government-run Medicare program. The health care law will also effectively begin to cap insurance company profits in 2011. Insurers will be required to spend 85% of large-group and 80% of small-group plan premiums on medical costs, or else improve health-care quality or return the difference to customers in the form of a rebate. However, Wellpoint reportedly reclassified certain administrative expenses--$500 million dollars worth--in a way that increased its medical loss ratio. In January, Wellpoint began costs such as as nurse hotlines, "medical management," and "clinical health policy," under medical benefits. Thus, the impact remains to be seen.^[14]

Rising Unemployment in has led to a Decrease in Health Care Enrollment with Subsequent Losses in Membership.

The 2008 economic crisis has impacted unemployment rates up to current, with unemployment rates reaching at around 9-10% levels -- the highest it has been in a quarter-century.^[15] 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.^[16] As a result, health insurers has seen a decrease in growth in net income and operating earnings, especially in its health care market.

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%. 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.^[17] These competing pressures are having the overall effect of lowering all health insurers' revenues and margins. Health insurer'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.

Competition

Aetna differentiates itself from other players in the industry by offering improved communications to customers, especially those purchasing employer-based health care. ^[18] Aetna offers information management services to its customers in all areas, especially in the Health Care market.

• UnitedHealth Group (UNH)-- UnitedHealth Group is a diversified health care company that operates in four segments: Health Care Services, OptumHealth, Ingenix and Prescription Solutions.
• 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.
• WellPoint Health Networks (WLP)-- WellPoint is a health benefits company that is licensed by the Blue Cross and Blue Shield Association.

References

1. ↑ AET 2009 10-K; Part 1: Business, Page 1
2. ↑ AET Google Finance Profile
3. ↑ Shares Rise on Aetna Acquisition Rumor
4. ↑ ^{4.0 4.1}
5. ↑ [ http://ccbn.10kwizard.com/xml/download.php?repo=tenk&ipage=6792610&format=PDF]
6. ↑ ^{6.0 6.1 6.2 6.3 6.4 6.5} AET 2007 Financial Annual Report; Consolidated Statements of Income, Page 45
7. ↑ Aetna Reports Fourth-Quarter and Full-Year 2009 Results
8. ↑
9. ↑ Aetna's 1Q profit rises 4 pct, revenue falls
10. ↑ AET 2009 Financial Report; Selected Comments on Financial Data, Page 76
11. ↑ [ http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzY0NDEyfENoaWxkSUQ9MzU4NzQwfFR5cGU9MQ==&t=1]
12. ↑ Wikipedia: Patient Protection and Affordable Care Act
13. ↑ Insurers Brace for fast and furious costs
14. ↑ Advantage/Part D Contract and Enrollment Data
15. ↑ Unemployment Hits 8.5%; 663,000 More Jobs Lost
16. ↑ Unemployment, Health Care Spending Affect Mortality
17. ↑ Healthcare costs for U.S. companies seen rising 9 percent: survey
18. ↑ Aetna Launches New National Advertising Campaign