U.S. health insurer Aetna Inc failed to provide any hints on reported merger talks with CVS Health Corp when discussing quarterly results on Tuesday and laid out obstacles to 2018 earnings growth, sending its shares lower.
The company reported a better-than-expected third-quarter profit despite a decline in revenue related to a scaling back of its Obamacare individual insurance business, which Aetna expects to lose about $200 million on this year.
Aetna said it expects member medical spending to stay low this year, a trend that has benefited the health insurers and dragged down hospital revenues, and that the moderated spending would likely continue into 2018.
The No. 3 U.S. health insurer did not provide a 2018 revenue or profit forecast, but executives said on a conference call with analysts that 2018 earnings growth would be hindered by a reinstated industry-wide 3 percent health insurance tax, which represents a hit of 25 cents per share.
Aetna shares were down about 0.5 percent in afternoon trading [on Oct. 31].
Evercore ISI analyst Michael Newshel called out the comments about 2018 in a research note, saying that Aetna will be better positioned to return to its long-term revenue growth target of mid- to high-single digits in 2019.
The commentary suggested that upside is limited for 2018 earnings based on the current consensus, which is for earnings of $10.14 per share, Leerink analyst Ana Gupte said.
Aetna Chief Executive Officer Mark Bertolini started the call by declining to comment on rumor or speculation, referencing last week’s reports that pharmacy CVS Health offered to buy Aetna for more than $200 per share, or more than $66 billion.
CVS currently has a contract to manage much of Aetna’s drug benefits. Bertolini said that the company would make a decision about the contract internally by the end of this year, and a public decision by mid-2018.
Aetna rival Anthem Inc recently announced it would stop using drug benefit manager Express Scripts Holdings and manage more in house and through CVS.
Aetna has mostly pulled out of the individual markets under Obamacare for 2018 because of instability, with enrollment below expectations and premiums soaring.
In 2017, it said it still expects to lose money on the business. Bertolini said the company would consider reentering the individual market when it stabilized.
Bertolini said Aetna is considering relaunching short-term, one-year transition insurance plans for individuals, in line with U.S. President Donald Trump’s executive order of earlier this month. Such plans are restricted to three months under former President Barack Obama’s Affordable Care Act, often called Obamacare..
Republicans want to roll back Obamacare, which established key benefits that almost all individual insurance plans must offer and set up an online market where more than 10 million people buy their insurance. Current transition plans do not provide these benefits.
Net Income Up
The company said net income rose 39 percent to $838 million. Revenue dipped 5 percent to about $15 billion, partly due to Aetna’s reduced presence in the Obamacare business.
The insurer said its medical benefit ratio, the percent of premiums spent on claims, fell to 81.4 percent in its commercial business from 83.8 percent a year earlier.
It said that it expects its overall medical costs to rise 5.5 percent in 2017.
Excluding items, Aetna earned $2.45 per share, beating analysts’ average estimate of $2.09, according to Thomson Reuters I/B/E/S.
Aetna said it now expects adjusted earnings for 2017 to be about $9.75, up from its previous estimate of $9.45 to $9.55 per share.
(Additional reporting by Ankur Banerjee in Bengaluru; Editing by Meredith Mazzilli)
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