Aetna 2Q16 Earnings Call Notes

Aetna (AET) Mark T. Bertolini on Q2 2016 Results

We are in the process of defending against Justice Department

“As most of you are aware, we are in the process of defending the Justice Department lawsuit to block our proposed acquisition of Humana. The DOJ action ignores the simple fact that there is robust competition in Medicare, as evidenced by, all Medicare eligibles are free to choose between traditional fee-for-service and Medicare Advantage, and approximately 70% of the Medicare eligible population chooses traditional Medicare.”

reassessing level of participation in exchanges

“In light of the disappointing year-to-date performance, and updated 2016 projections for our individual on and off exchange products, combined with the significant structural challenges facing the public exchanges, we believe it is only prudent to reassess our level of participation on the public exchanges. Our initial action will be to withdraw our 2017 public exchange expansion plans. ”

Losing $300m this year in ACA business

“We expect the year to have a loss on ACA business of – in excess of $300 million. We are evaluating our footprint as it exists today to understand what solutions we can put forward to either fix the business, or exit the business. And so we’re going through that analysis now. As you know, there’s a short window to divestitures. But the simple – the solutions here are really two.

The problem with exchange is that the current risk adjustment mechanism does not include specialty pharmacy

“First, let me make the comment that the people that are seeking care through these exchange products need this care. So these aren’t people running off to get services that they don’t need. These are people that need the care that they’re getting. What we’re seeing in the exchanges is double-digit trend year-over-year, overall. You can double that when you talk about pharmacy. And you can triple that initial number when you talk about Specialty Pharmacy. So we have two very important things going on in the exchanges here. First, we now believe we have third parties paying premiums for special interest groups both in a small group and individual that are supporting people getting access to these services. And because of that, we have – while we have the same demographic mix in this population, we have a much higher intensity and morbidity in that population, largely around Specialty Pharmacy. So given that the current risk adjustment mechanism does not include pharmacy, we’re not actually – nobody is getting adequately reimbursed, and given that the risk adjustment mechanism is a zero sum game, there is no way to fix this unless we include pharmacy, we deal with the eligibility requirements of third party payers paying premium, and we find a way to cover these individuals.”

Issues must be addressed around eligibility and risk adjustment

“Kevin, let me – this is really a balance sheet discussion and what happens to our capital and how big the loss could get. Unless some of these issues are addressed around eligibility and the risk adjustment, this could get a lot worse. And so we have to evaluate each market by its level of volatility, the other competitors, our amount of share in that market and whether or not it’s appropriate for us to take that risk absent any other changes in the program.”

Shawn M. Guertin – CFO, Executive VP & Chief Enterprise Risk Officer

23m members

” We ended the quarter with 23 million medical members, essentially flat with the first quarter of the year. We grew operating revenue by 5% over the prior year to a record quarterly level of nearly $16 billion, driven by higher healthcare premium yields and membership growth in our Government business, partially offset by membership declines in our Commercial Insured products.

Expecting MLR at 82%

“We now project that our full-year total health medical benefit ratio will be in the range of 82% to 82.5%. The increase from our previous projection is driven by our updated view of our ACA products. Based on our improved outlook and adjusted operating revenue and continued cost control initiatives, we now project that our operating expense ratio will be approximately 18%.