Medical Bloodbath continues:Aetna Falters on Rising Medical Costs
siliconinvestor.com
HARTFORD, Conn., Apr 10, 2001, (A. M. Best via COMTEX) -- Aetna (NYSE: AET chart, msgs) said its first-quarter results are expected to be "significantly lower" than estimates, due to "increasing medical costs" in fourth quarter 2000 and first quarter 2001.
As a result, the company said it cannot confirm its previous projection of $1.20 to $1.30 a share in operating earnings--$3.50 to $3.60 a share in cash operating earnings--which is before goodwill amortization, for the full year 2001.
Fred Laberge, a spokesman for Aetna, declined to comment, adding that Aetna will release more information when its first-quarter earnings are released May 10.
The bad news sent the company's stock tumbling. On the afternoon of April 10, it fell 17.95% from its previous close to $29.66 a share.
Based on current information, the company expects to record approximately $90 million before taxes of additional medical costs related to services performed in prior periods--primarily the fourth quarter of 2000.
"Almost half" of this amount was caused by additional medical costs related to a Medicare market the company exited Jan. 1, the company said. This will be treated as a nonrecurring "other item" in the first-quarter earnings release, Aetna said. The remainder reflects a fourth-quarter commercial HMO medical cost trend, based on current information, of approximately 13%, compared to the approximately 12% that was estimated previously.
"These continued increases in medical costs are clearly unacceptable and do not reflect the positive potential of Aetna," John W. Rowe, M.D., chairman, president and chief executive officer, said in a statement, who added the company's new management is "intensely focused" on determining the root causes of the medical costs and "taking corrective action."
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The group insurance, large-case pensions and nonrisk businesses are performing consistent with expected levels. The company said its premium yields and administrative expense reductions are "on plan." And first-quarter interest expense is expected to be lower than previously projected, due to favorable market conditions.
Earlier this year, Aetna's Chairman William H. Donaldson, who stepped down as chairman April 1, and Rowe in their 2000 letter to shareholders, noted the company "took swift and aggressive action" to improve the company's bottom line (BestWire, March 30, 2001). The company exited unprofitable Medicare HMO markets and made plans to sell or fix underperforming commercial HMO markets, they wrote. It also began converting, or "culling," unprofitable Prudential HealthCare members, and price increases were put in place, market by market.
In 2000, Aetna also developed "very significant" cost-reduction targets for 2000 and 2001, they wrote, noting they had identified initiatives expected to result in savings "of at least $200 million pretax" for 2001 (BestWire, March 30, 2001). The company is projecting that the combined impact of these savings, partially offset by inflation and other increases, will lower its net selling, general and administrative expenditures by $50 million in 2000.
(By Fran Matso Lysiak, associate editor:fran.lysiak@ambest.com)
Fran Matso Lysiak |
