16 Mar

What Are Aetna’s Key Risks?

WRITTEN BY Margaret Patrick

Key risks

Aetna faces a unique combination of business risks, in addition to industry-specific risks.

What Are Aetna’s Key Risks?

Regulatory risk

Compared to its peers, UnitedHealth Group (UNH), Anthem (ANTM), and Cigna (CI), Aetna (AET) participated in a larger number of public exchanges in 2014. The company is continuing its aggressive exchange strategy through 2015. The HHS (US Department of Health & Human Services) reported that for 2015, 87% of the enrollments through the federally run online exchange HealthCare.gov platform were eligible to receive tax subsidies from the government, which was higher than the 80% eligible in 2014.

The ACA (Affordable Care Act) provides tax credits to low-income households to assist with the cost of health insurance on insurance exchanges.

The Supreme Court has agreed to hear a case deciding whether tax subsidies should be provided to people buying insurance through federally run exchanges, based on the interpretation of a particular clause in the law. If the Supreme Court enforces strict interpretation of this clause in its June 2015 verdict, people enrolled through HealthCare.gov will lose their federal subsidies.

In the absence of federal subsidies, healthy people might opt out of coverage and only extremely sick people will continue with insurance. As the treatment is expensive, health insurance companies (XLV) will ultimately increase premiums, which will further reduce healthy enrollments and increase operating expenses for the companies.

Business mix risk

With the acquisition of Coventry Health, Aetna rebalanced its business mix and increased its revenue exposure to government-sponsored business from 22% in 2010 to 38% in 2014. However, the company still derives 58% of its revenues from commercial business, which includes large employers, small employers, and individuals.

Employer-sponsored coverage has been on a downward trajectory, and only 54% of the population had this type of coverage in 2013, down rom 61% of the population in 1987. Also, the possibility of elimination of tax benefits given for employer-sponsored health benefits and Cadillac tax can further reduce the opportunities in this business. To find out more about Cadillac tax, please refer to How will the Cadillac tax affect the hospital industry?

Input risk

Increasing costs of labor and specialty medications have pressurized Aetna’s profitability. Drug inflation is a major concern for Aetna, as the company has about 1.5 million prescription drug plan enrollees.

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