Aetna’s third-quarter results lay out its insurance value for CVS Health. Revenue at the $56 billion health-coverage firm fell 5 percent in the three months to the end of September, partly from dumping some Obamacare policies. But profit jumped 48 percent as the company kept costs under control. That offers alluring protection for CVS, whose pharmacy and drug-benefit business is threatened by rising competition and transparency.
Amazon is at the forefront of this challenge. The internet company is ramping up an effort to sell pills and other goods to patients and Chief Executive Jeff Bezos regards short-term profit as an afterthought.
CVS’s other business is to act as the middleman negotiating cheaper drug prices and keeping a slug of the savings. Decent returns here depend on keeping the market opaque. Clients, however, are wondering if the system benefits them; reducing the murkiness of price setting, whether by political process or Amazon-inspired competition, could leave less for CVS.
Now consider Aetna. The firm’s management wouldn’t talk about CVS’s bid on the earnings call with investors. But it has over 22 million people covered by its medical plans and is becoming better at figuring out how to squeeze more profit out of them by reducing spending.
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In its big healthcare segment, its medical benefits ratio – a key measure of costs relative to premiums – decreased to 81.5 percent in the first nine months of 2017, an improvement of a fifth of a percentage point from the same period last year. That helped it to easily beat analysts’ profit estimate. Aetna also raised earnings guidance for the full year.
Finding growth will be more difficult for Aetna. Extracting itself from the individual policy market for Obamacare probably means a stagnant top line in 2018. Merging with big direct rivals is also out of the question after regulators shot down its proposed deal for Humana. That makes a CVS bid and its 25 percent premium to Aetna’s undisturbed share price more tempting.
The real attraction of Aetna, however, is the insurer sending all these clients its way. CVS has made a big push into offering medical services such as vaccinations, routine medical care for earaches and even performing home infusions. It’s more convenient for patients and cheaper than an emergency room. That combination could keep Aetna’s higher profit trend going straight into the combined firm’s pocket.
Date: Oct 31, 2017