July 30, 2015 / 10:24 AM / 2 years ago

Health insurer Cigna says second-quarter medical costs stay low; profit beats

(Reuters) - Health insurer Cigna Corp, which agreed last week to be bought by Anthem Inc for $47 billion, said on Thursday that medical services use was low in the second quarter, helping to keep costs in check and beat Wall Street profit estimates.

Cigna CEO David Cordani is interviewed at the Reuters Health Summit 2014 in Washington April 1, 2014. REUTERS/Gary Cameron

Cigna’s report of a continued low utilization trend backs up a growing industry view of this closely watched component of insurer profitability. Anthem made similar comments on Wednesday, when it reported better-than-expected quarterly earnings.

Health insurers have benefited from low medical services use during the past five years as the weak economy has kept down doctor visits and hospitalizations and membership growth has helped increase revenues.

But the rate of overall health spending has begun to increase and medical use is expected to rise more as the economy improves. The national healthcare reform law, also known as Obamacare, has contributed to the increase as millions of people gained health insurance coverage in the past two years.

That is driving insurers to consolidate to build scale to help keep costs down and negotiate better deals with doctors and hospitals.

“The reason why there is so much consolidation is because utilization and the cost trend overall will go up, which will pressure the profitability for these companies long term,” Morningstar Research analyst Vishnu Lekraj said.

Aetna Inc agreed to buy smaller rival Humana Inc in early July, just weeks before Anthem and Cigna reached a deal.

The mergers are expected to face antitrust scrutiny as regulators consider their effect on insurance premium rates. The concerns have kept Cigna shares far from Anthem’s offer price of more than $183.

Cigna shares dipped 0.4 percent at $144.81 on Thursday.

Cigna Chief Executive Officer David Cordani said on CNBC on Thursday that the companies were already talking to state and federal regulators. “We will fully engage with state leaders and federal leaders and those conversations have already started,” Cordani said.

Cigna said its ratio of medical claims paid as a percentage of premiums taken in, or MCR, was 77.5 percent for its commercial business and 84.4 percent for its government business. It expects medical costs to rise 5 percent to 6 percent in 2015.

Net profit rose to $588 million, or $2.26 per share, for the second quarter, from $573 million, or $2.12 per share, a year earlier.

Excluding items, Cigna earned $2.55 per share, beating the average analyst estimate of $2.31, according to Thomson Reuters I/B/E/S. On Friday when it announced the Anthem deal, Cigna said second-quarter earnings would be at least $2.50 per share.

Cigna manages insurance plans for large companies and sells health plans to individuals on government exchanges created under the U.S. Affordable Care Act. It also manages government Medicare and Medicaid plans.

Premiums and fees in Cigna’s commercial and government businesses rose 10 percent in the second quarter, boosted by the addition of 524,000 customers.

Revenue rose about 9 percent to $9.49 billion, just below the average analyst estimate of $9.53 billion.

(Corrects spelling of name Vishnu in 6th paragraph)

Reporting by Caroline Humer in New York and Amrutha Penumudi in Bengaluru; Editing by Simon Jennings and Jeffrey Benkoe

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