National health insurer Aetna disappointed its shareholders again with its second quarter numbers, showing a 28% decrease in operating earnings and “significantly higher” commercial medical costs.

The results continued to fuel claims that the company gained market share in recent years by undercutting its prices, a strategy that in the end usually fails. Its commercial medical benefit ratio was 85.9%.

Ronald A. Williams

“Our second quarter results do not meet our expectations or the standards we have established over several years of strong operational execution and financial performance,” said Ronald A. Williams, Aetna’s chairman and CEO, said in a statement. “We continue to see upward pressure on medical costs beyond what we projected in early June, which we believe is driven in part by changing provider behavior in the face of a deep recession. We did not fully capture the impact of these forces in our 2009 pricing. This is disappointing, but it can be fixed.”

Increases in commercial medical costs were “largely the result of continued higher claim intensity, such as services rendered in a higher cost setting and more tests and procedures per visit, resulting in higher costs for emergency room, ambulatory, laboratory and preventive services,” said Mark Bertolini, Aetna’s president.

“We are taking immediate actions to address these issues,” he added.

Joseph M. Zubretsky, executive vice president and CFO, said the company continues to have “a very strong financial profile and capital position, and our health care revenue growth is strong. In addition, we continue to effectively manage our operating expenses while making the appropriate investments to ensure our long-term competitive strength.”

The news caused Standard & Poor’s to lower its outlook on Aetna from “stable” to “negative,” saying its 2009 projected operating performance is “below our expectations,” according to a statement from Timothy Pai, a credit analyst for the ratings service.

“If Aetna’s operating performance deteriorates further in 2009-2010 and pretax earnings fall significantly below $2 billion or if EBITDA interest coverage falls well below 10 [times], we could lower the ratings by one notch,” Pai said. “Conversely, if earnings stabilize over the next 12-18 months, we could revise the outlook back to ‘stable.’”

Revised 2009 pretax operating earnings (excluding realized gains and losses) are now anticipated to be about $2.0 billion, down from estimates of $2.5 billion to $2.7 billion, with a return on revenue (ROR) of between 5% and 6%, down from the forecast 7% to 8%, S&P said. Its revised cash-flow (EBITDA) projections are $2.4 billion to $2.6 billion, with a margin of 7% to 8%.

Aetna reported membership of 19.1 million at the end of the second quarter.

The company said its second-quarter operating earnings also reflect the impact of lower-than-projected 2009 Medicare revenue, which the company previously disclosed.

The higher-than-projected medical costs experienced were not fully captured in 2009 pricing, which resulted in a higher commercial medical benefit ratio for the second quarter of 2009. The company said it is taking appropriate actions to address higher medical costs, including pricing actions, enhanced medical management and provider contracting. The company expects that full-year 2009 operating earnings will continue to be adversely affected by a higher commercial medical benefit ratio. As a result, the company has revised its full-year 2009 operating earnings per share projection, it said in a statement.