Aetna Earnings Call Insights: Medicare Advantage and Membership Trends

Aetna Inc (NYSE:AET) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Medicare Advantage

Justin Lake – JPMorgan: Just my questions are on Medicare Advantage. First, can you give us more color or specifics on the products that drove the issues in Medicare Advantage this quarter and what you did with 2014 bids to remediate?

Shawn M. Guertin – SVP, CFO and Chief Enterprise Risk Officer: Sure. Justin. Before I delve into the specifics, I want to make sure that that we keep three things here in context. Overall, obviously, as you heard our diversified portfolio of businesses are doing quite well, including Coventry. The majority of our Medicare business, say, 80% or so is performing quite well and consistent with our previous expectations. And as you mentioned and alluded to, we had full awareness of what I’m going to talk about as we evaluated our bids for 2014. So more specifically, the pressure that I referenced was observed in two really unrelated pockets of our business. One was some of our Aetna Individual Medicare Advantage offerings and the other was a single Coventry PDP plan offering. Both of these pockets of business experienced strong membership growth in 2013, particularly the PDP offering that I mentioned which grew 40% or so. In a nutshell, the experience on the new members in these products was higher than we had previously projected. As you know, experiencing higher costs on first year members especially in MA, isn’t atypical, as we generally have to ramp up medical management, revenue enhancement, and things like that can take time. But having said that they were still higher than we had previously projected. So in terms of – as I mentioned in terms of the bids, obviously, we recognize that. And in particular for these products, we took very tangible and measurable action around premium levels, benefit plan design, formulary changes and things of that sort to sort of address the issues. The one point I would make as well here is when you think about the statement that we just made that we now expect Coventry to end up at the higher end of our accretion range, that is inclusive of this issue on the PDP that I mentioned and I think it’s a testament actually to how well that business is performing overall.

Justin Lake – JPMorgan: And can you give us an idea of the size of these offerings in terms of how many Medicare Advantage members are affected, as well as Coventry PDP members?

Shawn M. Guertin – SVP, CFO and Chief Enterprise Risk Officer: Well, again, these two issues as I mentioned represent in total 20% at the most of our Medicare revenue. As I mentioned, the Individual MA that I mentioned is really isolated in Aetna’s book. That book in total was only about 160,000 members…

Justin Lake – JPMorgan: Then if I could just ask a follow-up on Medicare Advantage, any early thoughts on ’14 membership growth? And as you look at your employer group business, can you tell us whether these employers are expected to still have enough value to want to stay with the program, given the next two years of reimbursement pressure? And that’s it for me.

Mark T. Bertolini – Chairman, CEO and President: Sure Justin, as we look at 2014 Medicare and 2015, quite frankly, they’re going to be a couple of tough years relative to how rates are going to move, how the STAR Program is going to be implemented. But that’s against the backdrop where we have 100,000 people retiring on a daily basis and more and more people coming into the program. So we see it happening – I’m sorry on a weekly basis. We see it happening that there will be overall growth in the marketplace and we think we can continue to grow Medicare. Not as quickly as we have in the past would be the major headline there. On the employer side, we see more interest in Medicare exchanges, we see them continue to be interested, and I actually think there’s more momentum for them to move their employees to a Medicare Advantage program, so we think that bodes well for our group business.


Membership Trends

Scott Fidel – Deutsche Bank: I’m wondering if you could just give us an early look at how the membership trends appear to be shaping up for you in the national accounts market and Commercial ASO, and then just, if you can talk a bit about whether you’re seeing any changes in the competitive environment in the ASO business, particularly as it relates to the Blues just given that one of the large Blue competitors did guide to add significant membership in ASO in 2014…

Mark T. Bertolini – Chairman, CEO and President: Yeah, I think first of all, Scott that guide also included a very large data count of over 600,000 lives. So I don’t know that it was all national accounts membership. I think they were talking about ASC membership. As we look at the ASC market, we think it’s too early to tell in large part because of private exchanges becoming much more part of the conversation. So we think there are going to be delays in making decisions this year. However, we think that private exchanges, particularly those that move self-funded clients to fully insured, bodes well for us given that 4 to 5 times the revenue of margin on a dollar basis is associated with each of those accounts. So, too early to tell. We think that we are in the mix where we want to be. We believe we will hold our own, come 2014, but we see revenue shift occurring as more large employers consider private exchanges as a model.

Scott Fidel – Deutsche Bank: Overall for when thinking about the Blues, is it fair to say that you’re not really seeing a notable change in their competitive appetite on fees for 2014?

Mark T. Bertolini – Chairman, CEO and President: We don’t see anything notable or anything irrational, of course there are always pockets of irrationality but I’m not sure if that’s our view or competitors distinct advantage in the given market. So, right now we view the market as remaining very rational, everybody’s getting their fees, pricing to expectations in the exchanges, and we believe that this is still a rational market.

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