Morningstar | Aetna Reports a Mixed Quarter as Its Merger With CVS Remains on Track
Aetna reported a mixed quarter with operating revenue remaining flat and operating margin decreasing 37 basis points to 10.07%. The firm did a great job in controlling its medical costs as the overall medical cost ratio decreased 30 basis points to 79.7% and was driven largely from a 140-basis-point medical loss ratio decrease (to 77.1%) for the commercial segment. However, the firm's government segment, which largely includes Medicare membership, increased 50 basis points to 81.8%. We believe the cost trend for the firm's government-membership book highlights the need and opportunity for Aetna to merge with CVS. After these latest developments, we are reiterating our narrow-moat rating and $181 fair value estimate for the managed-care organization. The higher government cohort MLR for the quarter reinforces our belief that Aetna's potential merger with CVS is the correct move for the MCO. Of the four major health insurance markets (employer, individual, Medicare, Medicaid), we believe membership growth for Aetna will largely emanate from the Medicare and Medicaid markets. We believe Aetna can leverage the CVS retail store footprint and pharmacy benefit manager operations into a lower cost of care and servicing for its operations.Aetna is a health care benefits company. The company conducts its operations in three business segments: Health Care, which provides medical, pharmacy benefit management services, dental, behavioral health and vision plans provided on both an insured basis and an employer-funded basis and businesses products and services that complement its medical products; Group Insurance, which primarily includes group life insurance and group disability products and long-term care products; and Large Case Pensions, which manages a variety of retirement products (including pension and annuity products) primarily for tax-qualified pension plans.
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