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Anthem's medical spending rises on higher Obamacare costs

July 27, 2016

Anthem Inc., the No. 2 U.S. health insurer by membership, said medical spending rose in the second quarter, driven by higher costs from the insurer’s Affordable Care Act plans and Medicaid business.

The shares dropped as much as 4.1 percent, the biggest intraday decline since April 27, and were down 2.1 percent, to $134.62, late in the morning. Anthem said it spent 84.2 cents of every premium dollar on medical care, up from 82.1 cents a year earlier.

Sicker customers in Affordable Care Act plans led Anthem to say it now expects to lose money on those policies this year, though premium increases may help the insurer post profits next year.

The Indianapolis-based insurer had previously said it was planning to break even on the ACA, also known as Obamacare, in 2016. The losses in Medicaid stemmed from Iowa, which shifted medical coverage for the poor to private companies as of April 1.

Anthem managed to rein in administrative spending, helping its adjusted profit top analysts’ estimates. Earnings, excluding some items, were $3.33 a share, Anthem said Wednesday in a written statement, compared with the $3.23  average of estimates compiled by Bloomberg.

On a conference call with analysts, CEO Joe Swedish reiterated the insurer’s plans to pursue a court fight to win approval of the company’s acquisition of rival Cigna Corp. The U.S. challenged the takeover last week, saying the combination would limit competition and raise prices for consumers.

Costs tied to the acquisition of Cigna, which are excluded from the adjusted earnings figure, contributed to a 9.1 percent decline in net income to $780.6 million, or $2.91 a share.

Other second-quarter results:

— Revenue increased 7.2 percent to $21.5 billion.

— Membership increased to 39.8 million members, from 39.6 million in the first quarter.  Anthem expects 39.6 million to 39.8 million members for the full year. Some customers typically drop their policies throughout the year, especially in the new individual markets created by Obamacare.

Anthem has struggled with narrow margins this year, driven by high medical costs from selling plans on the Affordable Care Act’s exchanges. The company said its operating margin fell to 7.1 percent in the three months ended June 30, from 7.7 percent a year earlier.

While the exchanges are providing millions of new customers for health insurers, those customers have used more care. UnitedHealth Group Inc. and Humana Inc. are both sharply limiting sales of health plans to individuals next year after posting big losses from Obamacare policies.

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