Anthem ( ANTM) the largest for-profit Blue Cross Blue Shield health insurance provider, saw its stock drop by more than 4 percent on Wednesday, as investors reacted to rising costs pressuring its business.
The stock shed more than $12 to trade at $289.78 in midday dealings, and weighed on other health care sector stocks.
The health care giant reported an adjusted second quarter profit of $4.64 per share, beating a consensus forecast of $4.61. Although the company’s operating revenue rose by 10.8 percent in Q2, a surge in medical costs overshadowed Anthem’s raised earnings guidance, and an otherwise strong quarter.
Specifically, the company’s Medical Loss Ratio—the amount it pays out in claims compared to what it takes in in premiums—jumped to 86.7% this quarter, an increase from 83.4% from the comparable year-ago quarter.
On a conference call on Wednesday, Anthem executives attributed the MLR increase to the cost of higher-than-anticipated Medicaid spending, and blamed “a lack of appropriate premium and reimbursement rates.”
Chief Financial Office John Gallina insisted the effects were relatively contained.
“It is important to note that the challenges we face in our Medicaid business remain isolated to a handful of states and are very manageable given the size and breadth of our overall portfolio,” he said.
Without specifying which states, Gallina added that there are efforts in some of the states to evaluate a change in the payments they receive, to more accurately reflect the population that is covered.
He also added that the $80 billion pipeline of the Medicaid business provides a promising future for their bullish strategy in the sector.
The company has also focused on electronic health records access for enrollees, while putting an emphasis on value-based pricing and the social determinants of health, like food insecurity.
But exiting the Affordable Care Act (ACA) marketplace, the removal of the individual mandate, and pushing further into the government payor markets — especially Medicaid—have proven costly.
Other costs factors include a lower payout of adjusted risk payments, a part of the ACA, which have decreased the positive windfall the company received in previous years after it has pulled out of the ACA marketplace.
Anthem cited company’s acquisition of pharmacy benefits manager IngenioRx—the result of a fallout with Cigna’s Express Scripts Inc ($CI)—as a bright spot for growth.
CEO Gail Boudreaux said that despite increasing pressure on Pharmacy Benefit Managers (PBMs) and drug pricing coming out of Washington, D.C., the company has seen approvals from all 14 states in which the company offers commercial plans. Anthem is also approved for a majority of the more than 20 states it operates Medicaid plans.
The company is also continuing its diversification with a deal with behavioral health giant Beacon Health Options expected to close in the fourth quarter this year. Beacon serves more than 36 million individuals in 50 states.
Anthem, however, did hike its 2019 outlook on multiple fronts, and expects higher full year revenue and earnings per share.