Higher medical costs take shine off Cigna second-quarter profit beat

(Reuters) – Health insurer Cigna Corp (CI.N) raised its 2019 profit forecast on Thursday, helped by last year’s acquisition of pharmacy benefit manager Express Scripts, but medical costs in the second quarter were higher than expected and its shares fell slightly.

FILE PHOTO: A screen displays the logo fro Cigna Corp. on the floor at the New York Stock Exchange (NYSE) in New York, U.S., July 16, 2019. REUTERS/Brendan McDermid

As health insurers face regulatory uncertainty amid political efforts to lower U.S. healthcare costs ahead of the 2020 presidential election, Cigna is hoping the $52 billion acquisition will help rein in its own costs.

In the quarter, however, Cigna’s medical care ratio – the percentage of premiums paid out for medical services – was 81.6%, above the 80.2% estimated analysts, according to Refinitiv data.

The company did report higher-than-expected earnings.

Bernstein analyst Lance Wilkes said that was mostly due to the pharmacy benefits business, while investors were likely focusing on the insurance side. “The higher valuation health insurance unit has some questions from medical costs and membership growth rate,” Wilkes said.

Medical costs have been an issue for the sector, with rivals like Centene Corp (CNC.N) and Anthem Inc (ANTM.N) also missing expectations.

Cigna Chief Executive David Cordani said in an interview that the company’s costs are growing within expectations, and that several factors influenced the ratio.

He cited lowered premium rates in its individual insurance business, the suspension of an industry-wide insurance fee and higher costs from Express Scripts drug plans.

“Costs relative to any industry measure are extremely positive,” Cordani said.

As the 2020 presidential campaign heats up among potential Democratic challengers to U.S. President Donald Trump, proposals by some candidates for Medicare-For-All programs that would eliminate private insurance has cast a pall of uncertainty over the sector.

Republican Senator Charles Grassley and Democrat Ron Wyden are also pushing legislation that aims to cut $100 billion in costs to government healthcare programs.

Cordani said Cigna is engaged in Washington policy discussions and that it backs aspects of that bill, such as preventing patients from receiving surprising medical bills.

Cigna earned $4.19 per share excluding items for the quarter, beating Wall Street estimates of $3.74, according to Refinitiv IBES.

Cigna now expects 2019 adjusted income of $16.60 to $16.90 per share, up from its prior view of $16.25 to $16.65.

Adjusted revenue from the health services unit, which now includes Express Scripts pharmacy benefits, rose to $23.54 billion from $1.11 billion last year.

However, Cigna said earnings were lower than comparable results from Express Scripts’ second quarter in 2018.

Cigna shares were down 0.3% at $169.40.

Reporting by Aakash Jagadeesh Babu and Tamara Mathias in Bengaluru and Caroline Humer in New York; Editing by Shailesh Kuber and Bill Berkrot

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