(Reuters) - Health insurer Anthem Inc (>> Anthem Inc), which plans to buy rival Cigna Corp (>> CIGNA Corporation) for $54 billion, on Wednesday said medical costs, particularly in its Medicaid and Medicare businesses, were at the low end of expectations and helped boost second-quarter profit.
Anthem raised its profit outlook for 2015 and said it expects health spending to increase at the lower end of a range of 6.5 percent to 7.5 percent this year. It also said that a key financial measure of medical costs fell during the quarter.
Health insurers closely manage costs to contend with a constant rise in medical spending. Cost increases had been held back for many years by the weak economy, but began picking up in 2014 with the improved economy and as the national healthcare reform law extended insurance to millions more people.
A few months ago, the largest U.S. insurers began scrambling to line up merger partners that would give them leverage to contend with the trend and negotiate lower prices with medical providers.
Consolidation has heated up across the healthcare industry, including among hospitals, doctor groups, pharmacy benefit managers, pharmacies and drugmakers.
On July 3, No. 3 health insurer Aetna Inc (>> Aetna Inc) said it would buy rival Humana Inc (>> Humana Inc) and Anthem on Friday said it would acquire Cigna to create the No. 1 U.S. health insurer with 53 million members.
Anthem, which operates Blue Cross Blue Shield plans in more than a dozen states, said on Wednesday that spending on medical claims as a percentage of premiums fell to 82.1 percent from 82.7 percent a year ago. That is about 30 basis points better than Wall Street estimates, according to Leerink Partners analyst Ana Gupte.
Anthem is the first insurer to report earnings since UnitedHealth Group Inc (>> UnitedHealth Group Inc) two weeks ago missed analyst expectations for that key ratio, a harbinger of cost increases.
"(Anthem's) loss ratios came in very favorably. That's a big plus considering there were some concerns about the UnitedHealth report," Gupte said.
Anthem shares were up 0.2 percent at $154.46.
REVENUE TOPS EXPECTATIONS
Anthem's net income rose to $859.1 million, or $3.13 per share, from $731.1 million, or $2.56 per share, a year earlier. Revenue increased 8.3 percent to $20.02 billion, topping analysts' expectations of $19.63 billion.
The company cited strong growth in its government Medicaid and Medicare businesses, where revenue rose 25.7 percent. Medicaid membership increased 11 percent.
Medicaid enrollments began to increase in earnest starting in July of last year as the expansion of Medicaid coverage for the poor kicked in, Anthem Chief Financial Officer Wayne DeVeydt said during a conference call.
Anthem expects 2015 adjusted net income to be more than $10 per share, up from its previous forecast of more than $9.90.
Analysts expected full-year earnings of $10.11 per share, according to Thomson Reuters I/B/E/S.
Excluding items, Anthem earned $3.10 per share in the second quarter, well above the average analyst estimate of $2.77.
(Reporting by Caroline Humer in New York and Amrutha Penumudi in Bengaluru; Editing by Anil D'Silva and Jeffrey Benkoe)
By Caroline Humer