Aetna Inc (AET.N) on Tuesday reported a better-than-expected adjusted net profit for the second quarter and said “moderate” medical costs boosted the profitability of its government Medicare and Medicaid plans.
The third-largest U.S. health insurer, which is in the process of buying rival Humana Inc (HUM.N), also raised its full-year forecast for adjusted net profit to at least $7.40 per share from $7.20-$7.40.
The $37 billion Aetna-Humana combination is part of a consolidation that insurers say will help them offer more competitive products amid changes due to the national healthcare reform law, often called Obamacare. Anthem Inc (ANTM.N) and Cigna Corp (CI.N) also plan to merge in a $47 billion deal.
The merger trend is also related to medical costs that have risen with the improved economy and as millions more people who have become insured through Obamacare visit doctors and hospitals.
Investors are closely watching how these costs impact insurers. Aetna said on Tuesday that its medical cost trends were moderate during the quarter, which helped improve its medical benefit ratio to 81.1 percent from 83.1 percent. The ratio represents the percentage of premium income that an insurer spends on medical claims.
Aetna said its second-quarter medical benefit ratio in its government business, which includes Medicare for elderly people and Medicaid for the poor, fell to 80.3 percent from 86.5 percent as it raised premiums and costs remained low.
The ratio for its commercial business rose to 81.8 percent from 80.6 percent, reflecting payments it put aside for the risk adjustment program that redistributes the costs of providing individual Obamacare insurance among insurers selling these plans.
“Second quarter results were well above consensus estimates as the company’s government business continued to report better-than-expected performance, while commercial underwriting margins were steady despite the company absorbing a significant hit from a $252 million risk adjustment payable,” Susquehanna Financial Group analyst Chris Rigg said in a note.
Aetna shares closed on Monday at $113.79, up 28 percent this year.
Aetna’s net profit rose to $731.8 million, or $2.08 per share, in the second quarter ended June 30, from $548.8 million, or $1.52 per share, a year earlier.
Excluding items, the company earned $2.05 per share, beating average analyst estimates of $1.82 per share, according to Thomson Reuters I/B/E/S.
Revenue rose 5 percent to $15.24 billion, still short of analyst expectations of $15.43 billion.
(Additional reporting by Amrutha Penumudi in Bengaluru)