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NEW YORK - Despite multibillion dollar potential, Aetna Inc. and UnitedHealth Group Inc. will likely only benefit modestly from new military health insurance contracts, an analyst at Deutsche Bank-North America said Tuesday.
In a note to investors, Scott Fidel wrote the health care companies will only see modest boosts to their earnings per share because of the military health insurance contracts. On Monday, The Pentagon picked the companies for its Tricare health program, replacing Humana Inc. and Health Net Inc. in 2010. Tricare is the Defense Department's health care program for military members, their families and survivors
Hartford, Conn.-based Aetna received the support contract for the northern U.S., and will provide health care and administrative services for about 2.8 million members of the military based in the 21 states in the region. Aetna's contract could be worth up to $16.68 billion. But, Fidel said, Aetna only plans on booking revenues for the service aspect of the contract, which he values at around $1.3 billion over the life of the contract.
Meanwhile, Minnetonka, Minn.-based UnitedHealth is taking over a contract for the southern region that could be worth up to $21.83 billion. Humana Inc. is currently under contract in that southern region through March 31, 2010.
Fidel said that UnitedHealth has not yet decided whether it will book gross or net revenues. He said the service component of the contract is worth $1.5 billion.
While the contracts will likely only have a modest benefit for Aetna and UnitedHealth, the awards for them are potentially severe blows to Louisville, Ky.-based Humana and Woodland Hills, Calif.-based Health Net, Fidel said.
"While we thought there was a good chance one of these incumbents would lose a contract, it was quite a surprise to see both of these long-standing incumbents fail to win a new contract," Fidel said.
He said Tricare was expected contribute about 20 percent of Health Net's earnings before costs in 2010. Humana, meanwhile, now faces the prospect of losing about 9 percent of its potential earnings before costs in 2010, while its core Medicare business suffers from reimbursement cuts.
He cut his 2010 guidance for Health Net by 15 percent to $2.04 per share and his Humana forecast by 7 percent to $4.35 per share.
Fidel reaffirmed a "Buy" rating and a $35 price target on Aetna shares. He reaffirmed a "Hold" rating on UnitedHealth and raised his price target to $26 from $25.
Meanwhile, he reaffirmed a "Hold" rating for Humana but cut the price target to $28 from $30. He also reaffirmed a "Hold" rating for Health Net, but cut the price target to $13 from $17.
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