Aetna Inc (AET.N) became the latest health insurer to tame investor fears that a health overhaul would crimp profits, particularly as it prospers from fewer Americans seeking care in the weak economy.
The No. 3 U.S. health insurer posted first-quarter financial results and gave a full-year forecast that trumped Wall Street expectations, and its shares rose nearly 8 percent. Health insurers’ stocks are trading at multi-year highs.
Even as they start implementing U.S. healthcare reforms that became law just over a year ago, many of these companies are confident enough about their financial health to start dividends or significantly raise payouts.
Their financial results show that Americans are still wary of the cost of seeing a doctor, even if they have insurance, due to rising co-pays and other fees. That lowers the amount insurers pay on medical claims.
Tim Nelson, a senior healthcare analyst with Nuveen Asset Management, pointed to “changes in the structure of healthcare plans that steadily over the years pushed more and more responsibility for healthcare costs onto the consumer.”
Analysts had expected use of medical services to rise as the U.S. economy improved, but there is still no evidence of a significant change.
“We’re seeing a continuation of the trend we noticed in 2010,” Aetna’s Chief Financial Officer Joseph Zubretsky said in an interview. “But we’re not projecting for it to stay this low for the foreseeable future. We think that there could be a resurgence later this year as the economy recovers.”
Kathleen Stoll, a deputy executive director of nonprofit consumer healthcare advocacy group Families USA, said low use of medical services could be positive if insurers were eliminating unnecessary costs, such as duplicative tests. But such a trend would be harmful if consumers were avoiding care to save money. Click here for special info.
“We don’t want people to forego preventive care that could mean they won’t catch something early that could be treated successfully and inexpensively and instead lead to a more serious condition,” Stoll said.
STOCKS STILL CHEAP?
One major change for this year under the new law is that insurers must meet certain thresholds for spending on medical care as opposed to administrative cost and profit.
Despite this, the companies are posting strong profits and raising their forecasts.
Even with stock price gains, large insurers, which trade between 9 and 11 times next year’s earnings estimates, are still seen by some investors as cheap. For example, the average price target for UnitedHealth shares is $54.32, more than 10 percent above the $49.10 price currently, with the high target of $60, according to Thomson Reuters data.
Other investors are concerned that the ongoing debate over U.S. healthcare could make these companies a target in campaigns for the 2012 presidential election, and so they are wary about buying these stocks.
“They’re easily vilified by the media and by politicians and therefore it’s going to mean they’re always going to remain volatile,” said Chris Konstantinos, healthcare strategist and portfolio manager with Riverfront Investment Group.
“Aetna and UNH, the bigger guys, are interesting here because they’ve started to institute dividends,” Konstantinos said. “But it’s a space that can break your heart.”
Aetna‘s first-quarter net income rose to $586 million, or $1.50 per share, from $562.6 million, or $1.28 per share, a year ago. Excluding certain items, earnings of $1.43 per share topped analysts’ average estimate of 97 cents, according to Thomson Reuters I/B/E/S.
Revenue fell about 3 percent to $8.39 billion. Aetna spent 79.2 percent of premium revenue on medical costs, down from 82.5 percent a year ago.
Aetna forecast 2011 earnings, excluding items, of $4.20 to $4.30 per share, compared with its expectation in February of $3.70 to $3.80. Analysts were looking for $3.75.
The new forecast equates to a profit increase range of 14 percent to about 17 percent expected for this year.
Aetna also said it would buy Prodigy Health Group, which runs self-funded health plans for mid-size employers, for $600 million. New York-based Prodigy operates in 15 states and has about 600,000 medical members. Its majority owner is One Equity Partners.