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Aetna scraps exchange expansion, sells Medicare Advantage assets

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Aetna Inc.'s net income rose 8.1% to $790.8 million in the second quarter of 2016, buoyed by growth in its government business even as it suffered large losses in health plans sold through public health insurance exchanges, which has prompted the insurer to scrap its exchange expansion plan.

The Hartford, Connecticut-based insurer also announced Tuesday that it and Humana Inc. have sold off Medicare Advantage assets in an attempt to satisfy Justice Department antitrust concerns about their potential merger.

Aetna on Tuesday reported total revenue of $15.95 billion for the three-month period that ended June 30, up 4.7% from the same period the year before, due to higher premiums and membership growth in the government business.

Even so, Aetna reported a $200 million pretax operating loss in its public exchange business, as sicker-than-average exchange enrollees choked the health insurer's profit.

Expansion withdrawn

Aetna Chairman and CEO Mark Bertolini, who last quarter said he expected Aetna to break even on the products it sold through exchanges in 2016, on Tuesday said this is no longer the case, and announced Aetna will withdraw its plans to expand into new exchange markets in 2017. He also said Aetna, which set aside $65 million in reserves for 2016 exchange losses, is re-evaluating its future participation.

Aetna sold plans through public health insurance exchanges in 15 states this year.

In addition, Aetna, whose deal to acquire rival insurer Humana Inc. was challenged by the Justice Department last month due largely to competitive concerns surrounding Medicare Advantage, announced that both Aetna and Humana will sell Medicare Advantage assets to Long Beach, California-based insurer Molina Healthcare Inc. in a bid to satisfy federal antitrust regulators. The $117 million cash deal is subject to the Aetna-Humana merger being approved.

As a result, Molina is expected to gain about 290,000 Medicare Advantage members in 21 states, Aetna said in a statement.

“We believe that taken together, these divestitures would address DOJ's perceived competitive concerns regarding Medicare Advantage,” Mr. Bertolini said during a conference call with investment analysts.

Mr. Bertolini, who remained confident the Aetna-Humana union will occur, also jabbed the Justice Department's analysis of Medicare market competition, stating that “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” coverage.

“A total of 178 Medicare Advantage organizations offer plans with 28 new organizations entering (Medicare Advantage) in the last three years alone,” Mr. Bertolini added.

Aetna reported health care premium revenue of $13.63 billion, up 5.4% year over year.

The government business showed “strong momentum,” Aetna Chief Financial Officer Shawn Guertin said during the conference call, as government business premiums grew 15.3% to $6.58 billion year over year. Mr. Guertin said government business, including Medicare and Medicaid, now accounts for nearly 50% of Aetna's total premiums.

Meanwhile, the commercial business posted less stellar results, as commercial premiums dipped 2.5% to $7.05 billion in the second quarter.

Medical membership remained essentially flat from the previous quarter at 23 million. Aetna's total medical benefit ratio was 82.4%, up from 81.1% the same period a year ago.

For the six months ended June 30, net income totaled $1.53 billion, up 1.2% from the same period the year before. Revenue totaled $31.65 billion, up 4.3% year over year, and premium revenue was $27.10 billion, up 4.7% year over year.

Aetna's medical benefit ratio for the first six months of 2016 was 81.5%, up from 80.1% in the year-ago period.