There’s a basic axiom in the business of health insurance. It goes like this: If you are a health plan and your membership is growing there’s a good chance you are beating the competition on price, and if you are beating the competition on price you run the risk of pricing below cost trends, and if you price below cost trends your profits will suffer, and if your profits suffer your stock price will fall–especially if you tell Wall Street you didn’t expect all of the above to happen.
Aetna shares were down about 5% as of 3:20 p.m. today, following yesterday’s late afternoon announcement that the company was lowering its profit forecast for 2009 in part because pricing wasn’t keeping pace with higher-than-expected costs.
The company blames the cost increase largely on the economy, e.g., people rushing to get care for fear of losing their jobs or coverage. It remains adamant that it isn’t pricing to gain market share at the expense of profits.
“The trade-off between growth and profitability is not one that we’re willing to make and if we have to sacrifice membership growth for 1-1-2010 in order to price to our new view of medical trend we will do that,” said chief financial officer Joseph Zubretsky on a conference call last evening with Wall Street analysts. (See transcript here)
You’ll recall that on April 29 Aetna shares fell 9% after the company reported a similar issue. But officials at the time said that the company had already adjusted prices, reassuring investors that it would meet its 2009 profit forecast.
Meanwhile, commercial membership rose nearly 9% in the first quarter, and the company expects total medical membership for the year to be up about 7%.
Aetna may not be pricing to win share, but it hasn’t been pricing to trend either. Wall Street analysts on the conference call were wondering why the company doesn’t just raise premiums enough to give it some wiggle-room in the spread between pricing and costs, even if that means trimming membership. After all, even tiny blips can loom large when your margin of error is small. Everything has to go right. Unfortunately, it hasn’t.
Subscribe in RSS Reader
