Aetna tops Wall Street’s 3Q expectations; So just how bad is it out there?

Aetna Inc.’s (Hartford CT) third-quarter earnings rose nearly 8% to top Wall Street forecasts, as growing government business and cost cutting countered higher costs from the health insurer’s Affordable Care Act coverage.

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But the nation’s third-largest insurer narrowed its 2016 forecast just below analysts’ expectations heading into the year’s final months, and its stock fell.

Aetna’s enrollment in government programs like Medicaid and Medicare grew 11%, to nearly 4.5 million people, and the insurer said Thursday that segment now contributes about half of its total health care premiums.

The insurer said that although revenue and profit rose in its latest quarter, struggles continue with pressure in the Affordable Care Act business, which it will largely exit next year, according to The Wall Street Journal.

Profit rose on higher fees and other revenue in Aetna’s core health-insurance business and lower general and administrative costs.

The Medicare and Medicaid business “continued to provide the improvement in earnings, which offset the decline in earnings due to the commercial small group and individual businesses,” wrote analyst Peter Costa of Wells Fargo.

Aetna tightened the range of its projected earnings for the year, to between $7.95 and $8.05 per share, from between $7.90 and $8.10.

The company remained dogged by its individual ACA plans, which account for a small portion of its overall membership, and it is now projecting a loss of about $350 million for the year on them, up from an earlier estimate of $300 million. Aetna said it had about 775,000 individual members who bought their coverage through the health law’s exchanges, and an additional 270,000 who have off-exchange plans.

Next year, Aetna is leaving 11 out of the 15 states’ exchanges where it currently sells plans, saying it is exiting business that was worth around $2.7 billion in 2016 revenue. Despite the pullback, however, Aetna warned it might still have losses on its individual business next year.

CEO Mark T. Bertolini said that to consider re-entering exchanges, Aetna would need to see changes to the ACA program known as “risk adjustment” that is supposed to help smooth results for insurers. Right now, he suggested, the pool of enrollees will produce results for insurers that are cumulatively about 10% to 15% below break-even.

Without changes, “we’re going to find ourselves in a premium spiral” in the exchanges, with rates increasing and healthy people leaving, Bertolini said.

The soonest Aetna could re-enter exchanges is 2019, he said, with 2020 more likely.

Aetna’s total medical membership fell 1.6% to 23.12 million in the quarter. Medicaid membership grew 9.3% to 2.4 million, while Medicare Advantage membership grew 9.5% to 1.4 million.

Aetna’s medical-loss ratio, a key measure of the share of premiums used to pay patient medical costs, rose to 82% from 81.1%. The ratio rose for its commercial members, driven largely by the ACA plans’ performance, but fell for its government-based business.

Aetna also said it was seeing losses for small-business plans sold under the ACA, though its margins are positive for small-business plans that were grandfathered from before the law took full effect.

For the quarter, Aetna reported earnings of $603.9 million, or $1.70 a share, up from $560.1 million, or $1.59 a share, a year earlier. When excluding transaction costs and other items, adjusted earnings rose to $2.07 a share from $1.90 a share.

The results came in above analysts’ projections of around $2.04 a share. Revenue rose 5.5% to $15.78 billion as operating revenue, which excludes net realized capital gains and losses, grew 5.2% to $15.05 billion. Analysts polled by Thomson Reuters had forecast $15.71 billion in revenue. Aetna closed the week down 3% at $107.39.

Steve’s Take: If I didn’t know better, I’d think the entire healthcare commercial insurance industry was in a death spiral, not Obamacare. With all the whining and wailing, with insurers bailing left and right from the exchanges, one can easily get such an impression.

But this is the most vicious, contentious presidential campaign–possibly in our nation’s history. Who knows what the truth is anymore?

Getting to the truth of practically any major issue seems akin to shoveling smoke. So just how really bad is the picture for private health insurers?

Aetna may be scaling back its participation selling individual private coverage under the Affordable Care Act, but it’s making a ton of money on the government’s other lines of business.

Aetna’s net income rose nearly 8% to $603.9 million, or $1.70 per share, in the third quarter compared to $560.1 million, or $1.59 per share, in the third quarter of 2015, the company said. Revenue jumped 6% to $15.8 billion thanks to plans it sells via contracts with state Medicaid insurance programs and the federal Medicare insurance for the elderly.

But claiming to be simply unable (I think the correct word is “unwilling”) to manage mounting claims of sick Americans signing up for Obamacare coverage on public exchanges, Aetna is scaling back to offering individual subsidized coverage in just four states for 2017. That compares to the 15 states where it sells on the ACA public exchange this year.

Being able to talk convincingly–simultaneously out of both sides of one’s mouth–is a talent reserved for only certain gifted people. Politicians, naturally, come to mind. But then there is an elite corps of business executives, equally skilled at saying things like, Obamacare is killing us, so we’re hightailing it.

But on the other hand, “Operating earnings in our government business remain robust,” Aetna CEO Mark Bertolini told analysts on the company’s third quarter earnings call Thursday.

And, hallelujah! Aetna said enrollment in Medicaid plans jumped 9% to 2.4 million in the third quarter compared to 2.2 million in the third quarter of 2015, according to Forbes. Why the windfall?

Well, Aetna, like other insurers including UnitedHealth Group, Humana, and Centene, are seeing growth afteNew Yr more states in the last two years opted to expand Medicaid under the ACA! There are now 31 states plus the District of Columbia that have expanded Medicaid.

So thank you, Affordable Care Act, for all this new, profitable Medicaid business, say the insurers. Alright, I haven’t actually heard of a single thank you.

Meanwhile, Aetna’s Medicare business is on a tear, netting more seniors into its health plans. Aetna said 90% of seniors are enrolled in its health plans that have earned four-star ratings or better on the government’s five-star scale.

Those ratings, which are based on quality measures, helped the company add 20,000 seniors to its Medicare Advantage plans, which now have nearly 1.4 million members.

So, again, just how bad is the picture with these premium price hikes?

The people who have been claiming all along that reform couldn’t work, and have been wrong every step of the way, are, of course, claiming vindication. But they’re wrong again, says The New York Times.

The bad news is real. But so are reform’s accomplishments, which won’t go away even if nothing is done to fix the problems now appearing. And technically, if not politically, those problems are quite easy to fix.

Health reform had two big goals: to cover the uninsured and to rein in the overall to “bend the curve,” in the jargon of health policy wonks. Sure enough, the fraction of Americans without health insurance has declined to its lowest level in history, while health cost growth has plunged: Since Obamacare passed Congress, private insurance costs have risen less than half as fast as they did in the previous decade, and Medicare costs have risen less than a fifth as fast.

But if health costs are looking good, what’s with the spike in premiums? Again, the answer is simple. It only applies to one piece of the healthcare system–the “exchanges,” the insurance markets Obamacare established for people who aren’t covered either by their employers or by government programs, mainly Medicare and Medicaid.

Many insurers entered the market in the belief that the system would work as advertised, The Times points out. After all, conceptually similar systems work in other countries, like Switzerland; Massachusetts has had a system along the same lines since 2006; and even now Obamacare is working pretty well in California, which has managed the program well.

Even if the direct effects of this year’s hike aren’t that big, could it mean that Obamacare is about to tank? No, says The Times. Most people on the exchanges receive subsidies, which means that the rate hikes most likely won’t induce them to drop out.

People, whose names I won’t mention, that have long been talking about an Obamacare “death spiral,” haven’t done their homework.

Can the current problems be fixed? I’ve pointed out that there are lessons that possibly can be learned from Medicare’s early history in addressing the Obamacare shortcomings. As far as the crucial task of fixing the current ACA risk-pool is concerned, I agree with those who say it’s really a no-brainer: strengthen the mandate and expand the subsidies.

Steve's Take: Fixing #Obamacare is a no-brainer: strengthen the mandate and expand the subsidies Click To Tweet

Other steps both the current and next administration need to address include closing the loopholes that have allowed some insurers to bypass the exchanges; taking a much more active role in setting standards and reaching out to families to make them aware of their options. Some states are doing much better than others, and The Times believes it wouldn’t take a lot of money to expand best practices to the nation as a whole.

So, is the latest news about the spike in insurance premiums a disappointment? Not to the Republican camp. Is Obamacare history? Not a chance. Can the problems be fixed? Absolutely.

Will considerable money have to be spent to expand the subsidies? Yes it will. Will Congress have to vote to spend that money? Yes; so let’s see what happens November 8, and at least we’ll have a clearer picture of how long it might take to put this brawl in our national rear-view mirror. Kind of like what we did with Medicare a long, long time ago.