Aetna has spent the better part of two years reviving its once-ailing healthcare business, after falling victim to rising medical costs and a string of operational miscues. Now it's Cigna Corp.'s turn in the hot seat.
Last week, Philadelphia-based Cigna said it would take a fourth-quarter charge of up to $100 million to restructure its beleaguered healthcare unit next year. The announcement came just days after the nation's third-largest health insurer slashed its third-quarter 2002 and 2003 earnings projections, largely because of pricing mistakes and service problems caused by a new computer system.
On Nov. 1, Cigna posted third-quarter operating income of $208 million, or $1.49 per share, down 24% from $273 million, or $1.83 per share, the same period last year. Revenue rose 8% to $5.2 billion.
The company also disclosed that the Securities and Exchange Commission is conducting an "informal" investigation into its operations. Analysts speculated the probe was prompted by the precipitous drop in Cigna's stock, which has lost roughly 40% of its value in recent days.
The latest results fall far below the $1.90 to $2.05 per share that Cigna officials had projected as recently as last month, and do not include $1.04 billion in previously announced third-quarter charges relating to the company's defunct reinsurance business. Including the charges, Cigna reported a net loss of $877 million, or $6.27 per share, compared with net income of $270 million, or $1.81 per share, a year earlier.
Cigna now expects full-year 2002 earnings of $915 million to $950 million, or $6.50 to $6.75 per share, down from previous projections of $7.85 to $8.15 per share. Profits in 2003 should be even lower-between $875 million and $925 million, or $6.25 and $6.50 per share-as Cigna works to reverse its fortunes by tightening cost controls, improving customer service and cutting staff, company officials said.
"Next year will be a rebuilding year," H. Edward Hanway, Cigna's president and chief executive officer, said during a conference call with analysts last week.
Cigna will start 2003 with a new chief financial officer, as James Stewart, who has served as the company's CFO for the past 19 years, retires on Dec. 31. Stewart will be replaced by Michael Bell, president of Cigna's group insurance unit.
Cigna's latest results represent one of the few black spots in what has been an otherwise robust reporting period for the nation's major health insurers (See chart).
Aetna continued its steady turnaround last week, announcing its third straight quarter of improved earnings. The Hartford, Conn.-based insurer posted third-quarter net income of $98.8 million, or 64 cents per share, compared with a loss of $54.4 million, or 38 cents per share, a year earlier as it raised premiums, cut overhead and controlled medical costs. Revenue fell 22% to $4.83 billion as the company reduced membership. PacifiCare Health Systems, another insurer in the midst of a multiyear turnaround, reported a 158% jump in third-quarter net income to $43.8 million, or $1.20 per share, even as revenue slipped 6% to $2.78 billion amid a drop in membership. The Thousand Oaks, Calif.-based insurer boosted its full-year earnings estimate to $3.90 per share from $3.40 previously.
Cigna's road to recovery, though, could be long and rocky. "I definitely see things getting worse before they get better," said healthcare analyst Lori Price of JP Morgan in New York.
The company has been struggling with customer-service problems and other glitches stemming from a five-year, $1 billion upgrade to its information systems. In a bid to appease frustrated clients, it offered deeper price discounts last year than it initially had planned or could afford, officials said.
Cigna also faces a lawsuit filed by thousands of doctors who said the insurer's billing system unfairly denies or reduces payments. A group of plaintiffs objected last month to a $200 million settlement offer, saying the deal would force doctors to resubmit claims from as far back as 1996 and failed to adequately resolve how the insurers would pay claims in the future. Cigna spokesman Wendell Potter said talks continue.
Hanway said he expects Cigna, which now has 14.1 million enrollees, to lose about 5% of its membership by January. Continued reductions could allow Thousand Oaks, Calif.-based WellPoint Health Networks, currently the nation's fourth-largest insurer with 13.1 million members, to surpass Cigna in size, analysts said.
Hanway also admitted that the company has had to rehire some staff after expected productivity gains from the new computer system failed to materialize. Last year, Cigna took a fourth-quarter charge of $62 million as it cut 2,000 jobs, or nearly 5% of its workforce, thinking the new technology would improve operations.
Cigna's Potter, however, said the company remains confident that the new computer system ultimately will be good for business. Indeed, Hanway blamed the bulk of Cigna's problems not on the technology but on former managers. "We clearly did not have the right leadership in our healthcare operations," he told analysts.
Patrick Welch replaced William Pastore as president of its healthcare division in May. Since then, Welch has replaced six top executives.