A Pennsylvania federal judge has thrown out a two-year-old securities suit against Hartford health insurer Aetna Inc., which accused current and former executives of making false statements about pricing strategies in an effort to boost the stock price.
U.S. District Judge Thomas O’Neill dismissed the case June 9, ruling that the alleged false statements were forward-looking and protected by “safe harbor” securities laws.
The judge also ruled that statements made by company executives were “immaterial” and accompanied by meaningful cautionary language that properly notified investors of the risks.
Chairman and CEO Ronald A. Williams, who was Aetna’s president when the suit was filed, was among the co-defendants. Former Aetna executives named in the suit included John W. Rowe, who was chairman at the time; Alan Bennett, who was chief financial officer; and Craig Callen, who was senior vice president in charge of strategic planning.
“We are very pleased with the court’s decision,” Aetna spokesman Fred Laberge said.
Consolidated into a class action lawsuit in June 2008, two separate investor complaints filed in 2007 alleged that Aetna executives assured investors that the company uses “disciplined pricing” strategy to maintain and lower its “medical cost ratio.”
But in reality, the suit alleged that the company was engaged in a scheme to inflate the company’s stock price by under-pricing insurance policies so that Aetna could report increased membership and market share, even though the pricing would result in smaller profits.
Aetna, like other health care companies, uses medical cost ratios (MCR) as a key measure of its profitability and future prospects. The lower the MCR, the lower medical costs are relative to premiums, the more profitable the company appears to analysts and investors.
A higher MCR signals to the market that an insurer is experiencing higher medical costs that are not being offset by a corresponding increase in premiums, making them less profitable.
Among other things, the suit alleged that Aetna concealed from investors that the company had begun charging too little for its health insurance products for the purpose of boosting their customer base.
The plaintiffs also alleged that the price inflation was orchestrated to allow Aetna insiders to cash-in on stock option awards while Aetna’s stock was trading at or near its all time high, thanks to the boosts in membership.
Then in mid 2006, the company announced higher-than-expected MCR figures, causing its stock price to plunge and erode shareholder value.
The judge noted that the misstatements were not made by Aetna with actual knowledge that they were false.
