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Public exchange claims limit profit, but Anthem vows to fight for Cigna merger

Posted On: Jul. 27, 2016 12:00 AM CST

Public exchange claims limit profit, but Anthem vows to fight for Cigna merger

Anthem Inc.'s net income slumped 9.1% to $780.6 million during the second quarter of 2016 as high medical claims in the public health exchange and Medicaid businesses ate away at profit.

Indianapolis-based Anthem, which experienced a setback last week when the U.S. Justice Department challenged its planned merger with Cigna Corp., also said it will continue to fight federal antitrust regulators to bring the transaction to a close.

“We're going to run out the litigation as long as it takes,” Anthem president and CEO Joseph Swedish said during a Wednesday conference call with analysts, adding that he expects the antitrust trial to begin in October and continue for at least four months.

Cigna's comment last week that the merger could close in 2017 at the earliest, “if at all,” fueled concern among observers that the insurers may back out of the deal.

Anthem's second-quarter earnings were hit by high medical costs from public exchange members with chronic diseases, including heart disease, diabetes and chronic obstructive pulmonary disease, as well as high payments for dialysis treatments, Anthem said. High medical claims among Medicaid members, particularly from a newly implemented contract in Iowa, also affected earnings.

Even so, Anthem's revenue jumped 7.2% to $21.46 billion in the three months ending June 30, due to premium increases and higher enrollment in Medicaid and commercial self-funded business.

Premium revenue increased 7.7% to $19.95 billion during the same period.

Medical membership grew by 148,000 members during the quarter and totaled 39.8 million as of June 30, fueled by membership growth in the national and local group businesses, but offset by lower enrollment in the exchange business.

Anthem said its public exchange membership now totals 923,000 customers.

While Anthem last quarter said it was close to breaking even on the public exchanges, the insurer now expects to lose money from policies it sells on the exchanges during 2016 because of high-cost members. Still, Anthem said it believes it can turn a profit on the exchanges in 2017 by focusing on medical management and raising premiums.

“Our updated outlook now expects the individual ACA-compliant business to incur mid-single digit operating margin losses for the 2016 benefit year,” Anthem Chief Financial Officer John Gallina said during the conference call.

Mr. Gallina said Anthem is working with the Obama administration to create “a sustainable marketplace” and called for the elimination of the health insurer tax beyond 2017 and a change to the risk adjustment program, which he said “overcharges for healthy (members) and over-reimburses for certain moderately unhealthy disease states.”

The benefit expense ratio, or the amount of premiums used to pay medical claims, rose to 84.2% for the quarter from 82.1% the same period a year ago, reflecting higher medical costs in the Medicaid, public exchange, and local group businesses.

For the six months ending June 30, net income was down 14.0% to $1.48 billion over the same period last year despite revenue of $41.74 billion, a 6.9% increase. Premium revenue for the first six months was up 7.8% to $38.94 billion. The benefit expense ratio was 83.1% vs. 81.2% in the prior-year period.