By Caroline Humer
(Reuters) - U.S. health insurer Aetna Inc reported higher quarterly profits on Tuesday as medical costs in its employer-based and commercial business remained low and it closed on its acquisition of Coventry Health Care.
Aetna Chief Executive Mark Bertolini said he was "increasingly confident" the company would have higher operating earnings in 2014, but warned that Aetna expects lower growth in private Medicare, where the government has cut spending.
Bertolini said Aetna was cautious about the rollout of the public health exchanges being created by President Barack Obama's health reform law, which are due to start to sell plans to individuals on October 1. The company is examining its participation, set at 14 states before the Coventry acquisition, and may cut back, he said.
"We are continuing to evaluate where Aetna and Coventry have submitted bids and are in the process of rationalizing our combined exchange participation," Bertolini said.
Aetna plans to take part in 15 private exchanges being created by benefits companies and others as online sites where employers can send employees to purchase health plans offered by several insurers, he said. Aetna is also working on launching its own exchange for Aetna products, he said.
Aetna's quarterly report comes after similar earnings beats by larger rivals UnitedHealth Group Inc and WellPoint Inc, which benefited from low spending by consumers on medical services.
People started seeking services from doctors and hospitals less frequently several years ago because of the weak economy, and the trend has continued.
Aetna said net income rose to $536 million, or $1.49 per share, from $457.6 million, or $1.32 per share, a year earlier.
Aetna announced plans to buy Coventry for $5.6 billion last year in a bet on growth of U.S. government-backed Medicare and Medicaid programs. As part of the Affordable Care Act, states have the option of making Medicaid available to more people and being reimbursed by the federal government.
The law set other rules for insurers, such as the percentage of medical premium revenue they can spend on healthcare costs. Aetna said it had a total medical benefit ratio of 82.5 percent versus 82.4 percent a year earlier.
Excluding gains and charges from lower reserves, a reinsurance settlement, acquisition costs and capital losses, the company reported earnings of $1.52 per share. Analysts on average were expecting $1.41 on that basis, according to Thomson Reuters I/B/E/S.
Aetna shares were little changed on the New York Stock Exchange, gaining 8 cents to $63.48 at midday.
"I think that the expectation on the upside was actually a little higher," said David Windley, an analyst at Jefferies & Co.
Coventry helped both profit and revenue. It added 3.7 million members, bringing Aetna's total to 22 million at the end of June. Aetna said 3.25 million members had insurance based on high medical deductibles, sometimes called consumer directed plans. Last quarter it had 3 million in these plans.
Revenue rose to $11.5 billion from $8.8 billion a year earlier.
For the full year, the company said it expects operating earnings of $5.80 to $5.90 per share. Analysts have forecast a 2013 profit of $5.82.
(Reporting by Caroline Humer; Editing by Lisa Von Ahn, Maureen Bavdek and Peter Galloway)