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Aetna’s Profit Warning Sends Its Stock Diving

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TIMES STAFF WRITER

A warning by Aetna Inc., the nation’s largest health insurer, that second-quarter profit won’t meet Wall Street’s expectations sent the company’s shares plunging Tuesday and sparked a broad sell-off in health-care providers’ shares.

Aetna, like many other insurers, had seen its stock rally sharply in recent months on optimism that rising health-care premiums would boost earnings significantly.

But the company said that internal tracking data indicated that the cost of providing health care to about 10 million of its health maintenance organization members rose 10% to 12% in the second quarter from a year ago.

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The Hartford, Conn.-based insurer said it is paying for more emergency room visits and outpatient surgeries; for longer maternity hospitalizations and for more visits by patients to specialists.

Aetna forecast second-quarter operating earnings of 85 cents to 95 cents a share, compared with analysts’ consensus estimate of $1.20 a share, as compiled First Call/Thomson Financial. The news sent Aetna’s shares diving $6.94, or 10%, to $59.69 on the New York Stock Exchange, and sent a shock wave through the industry, which had been enjoying a powerful stock rally since March.

A Morgan Stanley index of shares of 12 of the nation’s biggest health insurers and HMOs has risen 45% this year based on investor expectations that insurance rate increases were outstripping the rise in the cost of providing health care. That index sank 5% Tuesday on Aetna’s news.

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Among other insurers, UnitedHealth Group slid $3.69 to $83.25 on the NYSE, PacifiCare Health slumped $4.38 to $57.88 on Nasdaq and Foundation Health lost $1.19 to $13.69 on the NYSE.

WellPoint Health Networks, the owner of Blue Cross of California, bucked the trend. Its shares added $2.03 to $85.06 on the NYSE.

Many analysts believe that Aetna’s difficulties are an isolated instance and don’t signal trouble for health insurers in general. Aetna’s problems range from management turnover to trouble integrating its purchase of Prudential Healthcare a year ago to preoccupation with selling its financial services business.

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But a similar earnings warning by another big insurer could easily send the industry’s stocks into a tailspin, said Todd Richter, an analyst with Banc of America Securities.

“If there are more disappointments I would think that the group would have tremendous downside risk,” Richter said.

Nonetheless, Richter said he believes the rate increases of as much as 10% collected by many insurers earlier this year should be large enough to offset cost increases, which for the industry look to be averaging in the 8% to 9% range.

Kenneth Abramowitz, an analyst with Sanford C. Bernstein in New York agreed. “Most of the companies are slightly increasing their profit margins, but it is still a big race to outrun the cost growth,” he said.

Still, the Aetna warning left many investors unsettled, primarily because it fits an industry pattern of recent years: Rosy profit pronouncements--and healthy stock price gains--in the first half of each year have typically been followed by profit warnings in the second half.

“Every year for the past five years we have seen good rate increases at the start that have not turned out to be high enough to offset cost increases later in the year,” said Richter. “This raises the uncertainty that the increases might not have been enough once again.”

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Aetna’s shares had risen steadily since hitting a 7 1/2-year low of $38.50 in February. That low had prompted a bid by WellPoint and Dutch financial services group ING Groep to jointly buy Aetna for $70 a share. Aetna rejected that offer but is reportedly close to selling its financial unit to ING for close to $8 billion.

Aetna said it will announce its second quarter results on Aug. 4.

“We are very disappointed with this increase in medical cost trends,” said Aetna Chief Executive William H. Donaldson. He replaced Richard Huber, who resigned in February.

Donaldson said Aetna was moving to raise premiums starting in the fourth quarter and was looking to exit markets where it could not meet its financial or strategic goals.

Aetna in June said it would close Medicare HMO plans covering about 355,000 patients, mirroring a trend among HMOs nationwide.

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Volatile HMOs

Shares of major health maintenance organizations have gyrated wildly in recent years, typically rising early in the year on earnings optimism, then sliding in the second half. Monthly closes and latest for the Morgan Stanley index of 12 major insurers and HMOs:

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Tuesday: 325.20

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Source: Bloomberg News

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* INDUSTRY PLEDGE

Facing the threat of U.S. reforms, health plans vowed to improve services. A1

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