Humana Reduces 2012 Forecast as Medicare Costs Increase

By Alex Nussbaum - Jul 31, 2012 9:34 AM CT

Humana Inc. (HUM), the second-biggest provider of Medicare benefits, fell the most in more than three years after cutting its 2012 profit forecast on higher-than- anticipated costs.

Humana tumbled 9.8 percent to $63.66 at 10:17 a.m. in New York trading, after dropping as much as 10 percent for its biggest intraday decline since March 2009. Earnings this year may be $6.90 to $7.10 a share, the Louisville, Kentucky-based health plan said yesterday in a statement. That was below the $7.88 average of 10 analyst estimates compiled by Bloomberg.

The company generated three-quarters of sales last year from Medicare, the U.S.-backed program for the elderly and disabled, and Chief Executive Officer Michael B. McCallister said that new members were proving more expensive. Humana’s results contrasted with those of Minnetonka, Minnesota-based UnitedHealth Group Inc. (UNH), the top Medicare insurer, which raised its profit outlook two weeks ago, and Aetna Inc. (AET), which forecast higher full-year earnings today.

“It was increasingly clear that Humana management had been aggressive and mispriced their retail Medicare book of business for 2012,” said Ana Gupte, a Sanford C. Bernstein & Co. analyst in New York, in a note to clients today.

Second-quarter net income fell 23 percent to $356 million, or $2.16 a share, from a year earlier, Humana said. Profit also was reduced by an 18-cent charge for a lawsuit settlement.

‘Nobody’s Happy’

“Nobody’s happy with where we are at this moment, but this company still does understand what is going on in Medicare,” McCallister told analysts on a conference call yesterday. “I’d rather be us than anybody else in this space.”

Indianapolis-based WellPoint Inc. (WLP), the second-biggest insurer, reduced its profit forecast on July 25 after citing medical costs.

Humana was hit by what McCallister called “a perfect storm” of unanticipated spending. The company’s enrollment is growing as the U.S. population ages and the new members are using more medical care. The increase in doctor visits may have come because people put off care before joining Medicare due to the weak economy, said James Murray, Humana’s executive vice president, on the call.

Among existing members, wellness visits and preventive care were also up, likely because the 2010 U.S. health-care law required insurers to promote those services, Murray said.

Humana has responded by adjusting its prices and benefits for 2013. The company is confident it can return to its normal profit margin of 5 percent by next year, McCallister said.

‘Sound’ Strategy

“Our company’s strategy is sound,” he said. “We believe the steps we are taking to address certain short-term operational challenges will put us back on the path for sustainable earnings growth.”

McCallister is scheduled to retire next year, to be replaced by President Bruce Broussard, the insurer said last year.

Aetna’s second-quarter net income fell 15 percent to $457.6 million, or $1.32 a share, the Hartford, Connecticut-based insurer said in a statement. That beat analyst estimates and Aetna also raised the upper end of its full-year profit forecast, citing growing Medicare rolls along with improved profit margins in some plans. Aetna rose less than 1 percent to $37.41.

To contact the reporter on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net