Aetna cuts forecast on medical costs, shares fall

NEW YORK (Reuters) - Aetna Inc sharply cut its full-year earnings forecast on Monday because of higher-than-projected medical costs, sending shares down as much as 12 percent as the health insurer also posted a 28 percent drop in second-quarter net income.

Aetna, one of the largest providers of employer-based insurance, has boosted its enrollment while rivals struggle with such gains, but some analysts have worried that the gains could be a sign the company is underpricing and sacrificing profit margins.

The lower earnings reflect "the consequences of Aetna's aggressive market share strategy," Goldman Sachs analyst Matthew Borsch said in a research note.

The No. 3 U.S. health insurer expects 2009 operating earnings of $2.75 to $2.90 per share. In June, Aetna lowered its full-year outlook to $3.55 to $3.70 per share from an initial forecast of $3.85 to $3.95.

Even after Aetna cut its forecast in June, some on Wall Street expected the health insurer would slash its forecast again as industry-wide concerns over medical costs and underpricing catch up to the company.

Second-quarter net income fell to $346.6 million, or 77 cents per share, from $480.5 million, or 97 cents per share, a year earlier.

Excluding items, earnings of 68 cents per share fell 10 cents short of the average estimate of analysts, according to Reuters Estimates.

Revenue rose 10 percent to nearly $8.7 billion, compared to the analyst estimate of about $8.6 billion.

Hartford, Connecticut-based Aetna said higher medical costs stemmed from use of more services in the emergency room, laboratory and preventive services, which is a continuation of issues cited earlier this year.

"We continue to see upward pressure on medical costs beyond what we projected in early June, which we believe is driven in part by changing provider behavior in the face of a deep recession," Chief Executive Officer Ron Williams said in a statement. "We did not fully capture the impact of these forces in our 2009 pricing."

The company spent 86.8 percent of its premium revenue on medical costs in the quarter, up from 81.9 percent a year ago. It had to spend $65 million pre-tax to cover claims from prior periods, mostly in 2008.

For its commercial plans serving employers, it expects to spend between 84 percent and 84.5 percent of its premiums on medical costs for the full year.

Aetna's total membership stood at 19.05 million at the end of June, up 9 percent from a year ago.

An Aetna spokesman declined to comment on a report in the Wall Street Journal that said the company was shopping its pharmacy benefit business, citing unnamed sources.

Rival insurer WellPoint Inc announced plans to sell its pharmacy benefit unit to Express Scripts Inc for $4.68 billion in April, sparking speculation that other insurers would follow suit.

Aetna shares were down 7.6 percent, or $2.04, at $24.40 in premarket trading, after falling as much as 12 percent earlier in morning.

Through Friday, Aetna shares had fallen 7 percent this year, underperforming most rivals. Aetna also reported higher-than-expected medical costs for the first quarter.

(Reporting by Lewis Krauskopf, editing by Christopher Kaufman and Derek Caney)