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Aetna Prepares for Loss of 600,000 Members as it Raises 2010 Prices

Executives say the company can be more profitable by dropping some business -- the same decision the plan has made before.

Emily Berry

Back when it was the largest private health plan in the country, Aetna downsized its membership by millions but boosted profits during an overhaul of its business several years ago.

Now it looks to be making a similar -- but smaller -- move with a planned price increase for many of its customers in 2010.

The company figures it will lose between 600,000 and 650,000 members next year because of the price hikes.

In a conference call with investment analysts to discuss the company's third-quarter earnings, Chair and CEO Ron Williams told analysts, "The pricing we put in place for 2009 turned out to not really be what we needed to achieve the results and margins that we had historically been delivering."

Aetna President Mark Bertolini laid out how the company planned to raise prices to improve the company's profit margin. He said the firm had "implemented a combination of underwriting enhancements, pricing actions and plan design changes, intended to ensure that each customer is priced to an appropriate margin."
Aetna's profit margin was 11.1% in 2007, 10.3% in 2008 and 6.9% in the third quarter of 2009.

He predicted that Aetna would lose between 300,000 and 350,000 members from national accounts -- large businesses in multiple states -- because of businesses looking for "near-term cost savings." They would lose another 300,000 in smaller group accounts, which are medium- to small-size businesses.

Laying out specific expected membership losses is "pretty candid," said David Gibbs, a retired health insurance industry consultant from San Luis Obispo, Calif. He worked for and consulted with health insurers, including Aetna, for 25 years, and most recently was with New Jersey-based Health Economics Consulting Group.

He said Aetna's decision comes from a system that encourages insurers to drive away sicker members -- a strategy not unique to one insurer. "They're running a business, and their obligation is a very singular one: to increase shareholder profits."
Aetna is not alone

It's not unusual for executives to promise that profitability will take priority over membership growth. Some of Aetna's competitors are taking similar steps in 2010 and have done so in the past.

Angela Braly, WellPoint's president and CEO, told investors and analysts in 2008 that the company "would not sacrifice profitability for membership." She was referring to some insurers "buying membership" by reducing prices to boost overall growth.

Those kind of statements aren't rare, but it's less common for executives to be as specific as Bertolini was about how many members they expect to lose by raising premiums.

Because of the recession, health plans are treading a fine line between trying to keep membership numbers healthy and ensuring that the members they keep continue to generate a profit.

Most insurers have seen substantial membership losses due to recession-driven layoffs, and much of the decline has been in the more profitable commercial sector, while Medicaid and Medicare membership has grown.

Goldman Sachs investment analyst Matthew Borsch noted that Aetna has its work cut out.

"The repricing task is much tougher against headwinds of rising medical costs and declining health coverage, although the headwinds should ease next year," he wrote in a note to investors. "We expect Aetna to make steady progress on this front, but the progress may emerge more slowly than the more optimistic view would suggest."

Gibbs said simply raising prices probably would not get Aetna what it wants. That actually tends to result in sick people who are more "desperate" for coverage to keep it, and healthier groups to drop it. Instead, Aetna might change benefit designs, scaling back prescription drug coverage, for example, which sicker populations tend to value but healthier ones don't notice as much.

"There's a rule of thumb out there that 20% to 25% of the people account for 75% to 80% of health care costs," he said. "Avoiding that segment is probably the quickest route to making a lot of money."

Aetna's investors are eager to see a boost in the company's profits after 2009 brought unexpectedly high medical costs. In the third quarter of 2009, its medical-loss ratio -- the amount of each dollar spent on medical care -- was 85.6%, up from 80.9% over the same period in 2008.
Repeat move

This isn't the first time Aetna has taken this path to improved profitability.

As chronicled in a 2004 article in Health Affairs by health economist James C. Robinson, MD, PhD, Aetna completely overhauled its business between 2000 and 2003, going from 21 million members in 1999 down to 13 million in 2003, but boosting its profit margin from about 4% to higher than 7%.

Since then, the company has grown both its membership and its profitability. As of Sept. 30, Aetna had 19 million members. It remains the third-largest insurer behind UnitedHealth Group, with 32.9 million members, and WellPoint, which has 33.9 million members.

Aetna's profit margin has fallen, however, with a 6.9% margin for the most recent quarter, 7% in the second quarter and 8.8% in the first quarter.

Those are down from 10.3% for 2008 and 11.1% for 2007.

Williams said the company was aiming for a profit margin in the "high single digits" for 2010.

Analysts participating in Aetna's quarterly conference call asked Aetna executives about similarities between the strategy for 2010 and the company's moves earlier in the decade.

Bertolini said the reaction from customers was "different than happened seven, eight years ago. ... As we go into the marketplace with that pricing, we are watching each case closely. We get weekly reports, and the results so far are tracking with our expectations," he said.

Aetna spokesman Alfred Laberge declined comment beyond what executives said in the conference call, citing the company's decision not to give investors specific earnings guidance for 2010 until February.


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