July 24, 2019 / 10:29 AM / a month ago

UPDATE 3-Health insurer Anthem's medical costs overshadow earnings beat; shares sink

(Adds company comments, updates shares)

By Tamara Mathias

July 24 (Reuters) - Anthem Inc on Wednesday said medical costs were higher than expected in its Medicaid business that sells health plans for low-income customers, and the health insurer's shares fell nearly 5%.

Anthem reported a 10.2% decline in operating profit from the unit, driven by elevated medical cost trends for the U.S. government program in some states.

"One of the unfortunate parts about the Medicaid business is that the amount of premiums they receive and the risk that you're incurring do not always exactly align on a quarter-over-quarter basis," Chief Financial Officer John Gallina said.

"Over the course of the year ... the rates will be adjusted appropriately," he said, adding that the business was performing within the company's forecasts, albeit at the lower end of the range.

Concerns about the rise in medical costs compared with premiums overshadowed Anthem's slightly better-than-expected second-quarter profit and an increase to its full-year earnings forecast, which in part reflected the successful launch of its new IngenioRx pharmacy benefits business.

As some of the political pressure to bring down the cost of U.S. healthcare focuses on the insurers ahead of the November 2020 U.S. presidential election, Anthem has been diversifying its business. In May, it started shifting members to IngenioRx.

Chief Executive Gail Boudreaux said it was premature to comment on bipartisan legislation introduced in the U.S. Senate on Tuesday that targets drug pricing, or on other proposed rules the Trump administration is considering to lower costs for consumers..

"There are still a lot more details (to come) around these proposals and how they would work," she said.

Anthem said it now expects adjusted 2019 earnings of over $19.30 per share, up from its prior view of over $19.20.

The company now expects the IngenioRx contribution to the full-year earnings to come in at the upper end of its 70 cents to 90 cents projection.

The benefit/expense ratio - the percentage of premiums paid for medical services - worsened in the quarter to 86.7% from 83.4% a year earlier. Analysts on average expected 86%, according to IBES data from Refinitiv.

Anthem now expects a 2019 benefits/expense ratio of 86.2% to 86.5%. The previous low end of the range had been 85.9%.

Government paid plans like Medicare and Medicaid are a strategic priority for large health insurers, Forrester analyst Jeff Becker said.

"Anthem is hitting some speed bumps ... on growing and optimizing performance in this market," he said.

Excluding items, Anthem earned $4.64 per share, topping the analysts' average estimate by 3 cents.

Anthem shares were down 4.8% at $288.11. (Reporting by Tamara Mathias and Manojna Maddipatla in Bengaluru and Caroline Humer in New York Editing by Arun Koyyur, Tomasz Janowski and Bill Berkrot)

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