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Aetna Faces Supreme Court Healthcare Law Risk

By    |   Monday, 09 April 2012 12:05 PM

Aetna (AET) is in great shape for the current health insurance environment, but it faces the risk of a pending decision by the U.S. Supreme Court that could put it, and all health insurers, at a price disadvantage. In short, Aetna might be required under the law to provide broader coverage than before while the law is gutted in such a way that would fail to force the uninsured into the system.

Aetna is a major healthcare benefits provider, with 36.4 million customers. It threw off $3 billion in capital in 2011, repurchasing 45 million shares and starting a dividend that year that it raised to 70 cents per share annually in early February.

Aetna operates in three business segments: Health Care, Group Insurance and Large Case Pensions. It derives revenues primarily from insurance premiums, administrative service fees, net investment income and other revenue.

In 2011, the company made acquisitions it expects will improve its market positioning, including electronic records provider Medicity; third-party administrator business Prodigy; Genworth's Medicare Supplement business; and Payflex, to strengthen existing health savings account administration.

While analysts believe Aetna is in good shape for the current market, the company itself points out that the pending Supreme Court decision on President Obama’s healthcare reform law creates risks for all insurers.

“If the Supreme Court were to find the individual mandate unconstitutional, but generally uphold the remainder of Health Care Reform, particularly guaranteed issue, people with greater needs for health care services could make up an increased portion of our Insured membership, which would adversely affect our operating earnings and medical benefit ratios,” Aetna warned investors.

“These effects could be magnified if we are unable to obtain, or are delayed in obtaining, approval of adequate premium rate increases for the risk we assume.”

Aetna is a $17.39 billion market cap company, several times over the average of companies in the healthcare providers sector. Its trailing 12-month P/E ratio is 9.52 compared to 18.17 for the sector. AET has a five-year projected price-to-earnings-growth (PEG) ratio of 0.88 against 1.52 for its sector.

Projected earnings-per-share growth for the coming year is 9.92 percent, compared to 14.49 percent for the sector.

Healthy cash flow

Analysts are hot on Aetna at the moment, garnering multiple outperform ratings, including from Standard & Poor’s Equity Research, Columbine Capital Services, and Zack’s.

It comes down to readiness to engage the changes in play thanks to healthcare reform, which finally gains full market traction in 2014, presuming it is not dismantled by the Supreme Court.

“We think AET has the scale, diversity, innovative health information technology and healthy cash flow to perform better than most insurers amid healthcare reform,” S&P analysts write.

“We view positively its cost control initiatives and increasing diversification, including international expansion and penetration of the growing Medicaid market, which we view as poised to grow markedly in 2014 based on the health care reform law.”

AET next reports on April 26.

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Monday, 09 April 2012 12:05 PM
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