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Aetna Says First-Quarter Profit Below Expectations

Health care: The insurer cites lower-than-expected earnings on rising medical costs. Shares tumble almost 18%.


HARTFORD, Conn. — Aetna Inc., the biggest U.S. health insurer, said Tuesday that first-quarter profit was "significantly" below analyst estimates as medical costs rose more than expected. Aetna shares plunged almost 18% and cast a pall over other HMO stocks.

Aetna also said 2001 profit may be lower than the $1.20 to $1.30 a share it previously forecast. The company will take a first-quarter charge of $90 million before taxes for additional medical costs from before the first of this year.

Aetna's costs rose after the company, facing class-action lawsuits and patient-rights legislation in Congress, changed rules to make it easier for customers to see doctors, resulting in more use of medical services.

Doctors and hospitals also are charging insurers more, and Aetna hasn't raised rates enough to keep up.

"They did not leave themselves much room for error," said CIBC World Markets analyst John Szabo, who has a "hold" rating on the shares. "They're changing their business model and they underpriced."

Aetna shares fell $6.35 to close at $29.80 on the New York Stock Exchange. The shares have fallen 27% this year.

Aetna's problems, though, are specific to the company and don't mean other health insurers will see unexpected costs, said Merrill Lynch & Co. analyst Roberta Goodman, who has a "near-term neutral" rating on Aetna shares.

Still, shares of some rival health insurers also dropped. Wellpoint Health Networks Inc. shares fell $1.30 to close at $92.90; and UnitedHealth Group Inc. slipped 63 cents to close at $59.15, all on the NYSE. In Nasdaq trading, Santa Ana-based PacifiCare Health Systems fell 11 cents to close at $26.90 and Oxford Health Plans Inc. shares declined $1.03 to close at $25.09. The Morgan Stanley Health Care Payer index fell 2.4%.

"The HMOs have always moved as somewhat of a monolith," said Advest Inc. analyst Rob Mains. "Investors remember that and they react understandably skittishly,"

Aetna, which declined to comment beyond its news release, is scheduled to report first-quarter results May 10.

Tuesday's announcement marks the second time in a year Aetna has said profit will fall short of expectations. Last year, the company said second-quarter profit missed estimates after medical costs rose more than expected.

Aetna, which serves more than 19 million health-care members, has been grappling with boosting profit in its health business for several quarters amid rising medical costs.

The 148-year-old company is in the midst of a massive restructuring that includes layoffs, changes in business strategies and efforts to improve relations with doctors.

Aetna and other health insurers are under pressure to ease restrictions on care as they face lawsuits alleging denial of needed care and as Congress considers legislation to make it harder for them to deny coverage for medical services.

"Although Aetna has assembled an impressive management and outlined a turnaround strategy, we believe Aetna will not experience an earnings upswing until 2002," said David Shove, an analyst at Prudential Securities.

Aetna erred when it estimated increases in medical costs would slow to 10% this year from 12% in 2000, while other companies and analysts were expecting higher costs, Goodman said.

Medical costs for its employer plans increased at a 13% annual rate in the fourth quarter, and costs this year are "running considerably higher than previously projected," Aetna said. The company blamed "higher utilization of health-care services" for the increases.

"These continued increases in medical costs are clearly unacceptable and do not reflect the positive potential of Aetna," Chief Executive John Rowe said.

Szabo said Aetna could break even or post a loss for the year if medical costs rise further.

"Investors are going to discount 2001 as another throwaway year for Aetna," he said "This is going to be a two- or three-year turnaround and I think the market's going to have to come to grips with that."

A Medicare plan Aetna closed Jan. 1 accounts for almost half the expected first-quarter charge, Aetna said. Aetna had been expected to report profit of 28 cents a share, the average estimate of analysts polled by First Call/Thomson Financial.


Sickly Shares

Aetna's stock has under-performed other health-care stocks this year as higher medical costs and other issues have dogged the company. The stock dropped 18% on Tuesday after hitting a 52-week low of $28.75 earlier in the session.

Aetna daily closes and latest on the New York Stock Exchange

Tuesday: $29.80, down $6.35

Source: Bloomberg News

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