Although the current economic scenario has improved a lot, it is still posing a major challenge for Aetna (AET). The current state of the global economy and market conditions are quite challenging with high levels of unemployment, diminished business and consumer confidence and volatility in both the US and international capital and credit markets.

Membership has slumped throughout the health insurance sector as employers have cut jobs, thereby leading to a reduction in the number of people covered by employer-sponsored plans. We believe that given the current situation, membership is likely to decline further in the near future. This will have an adverse impact on Aetna’s profitability. 

Moreover, Aetna’s bottom-line is going to be hit during the fourth quarter by a $65 million charge associated with the decision of workforce reduction and real estate consolidation. In November of last year, Aetna decided to shed a total of 1,250 jobs or about 3.5% of its total workforce by the first quarter of 2010. Additionally, the company expects to consolidate field offices in some locations in order to reduce real estate costs. 

In this backdrop, the TRICARE contract (approximately worth $16.7 billion over five years) of the North region was a silver lining for Aetna. However, that too is tied up in litigation. Health Net (HNT), one of Aetna’s competitors, used to serve this area under the previous contract. However, unable to get the contract renewed, Health Net filed a protest with the Government Accountability Office (GAO) citing certain irregularities in the proposal evaluation and award decision and other factors. A final decision regarding the contract is yet to be taken. An unfavorable outcome will hamper Aetna’s outlook going forward. 

Problems continue for Aetna. We believe higher costs related to the spread of the H1N1 virus and expansion of Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) membership by laid-off workers caused Aetna to lower its outlook. Given these issues, we downgrade the stock to Underperform.
Read the full analyst report on “AET”
Read the full analyst report on “HNT”
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