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By Dinah Wisenberg Brin
Of DOW JONES NEWSWIRES
Humana Inc. (HUM) posted a 65% increase in third-quarter profit as the health insurer continued to struggle with high costs and declining enrollment in its commercial segment, offset by stronger performance in its Medicare business and better investment results.
The Louisville managed care company also issued 2010 per-share earnings guidance that is about $1 short of the company's projected 2009 EPS, reflecting the possible loss of a key military contract, lower Medicare margins and ongoing commercial enrollment declines. The forecast doesn't include any effects from potential health-reform laws.
Medicare margins benefited this year from pricing actions in stand-alone prescription-drug plans that sparked enrollment declines in those lines. Humana said it expects 2009 Medicare operating margins of 6.5% to moderate to the company's typical Medicare margin goal of 5% in 2010. Morgan Stanley said Humana's 2010 outlook also shows a higher-than-expected Medicare medical cost ratio, echoing UnitedHealth Group Inc. (UNH) and WellPoint Inc. (WLP) forecasts.
Humana shares recently fell 1.1% to $37.18.
For the third quarter, Humana cited the recessionary pressures and H1N1 flu virus effects that are hitting the entire managed care industry, with commercial segment results pressed by a deteriorating risk pool and "aggressive" provider billing practices, as well as spending increases by layoff-worried members who have met their deductibles.
"Our results this quarter reflect continued solid performance in our government businesses, offsetting continuing challenges in our commercial segment," Humana President and Chief Executive Michael McCallister said.
For the quarter ended Sept. 30, Humana posted third-quarter net income of $301.5 million, or $1.78 a share, up from $183 million, or $1.09 a share, a year earlier. The year-earlier result included high Medicare prescription-drug plan claim expenses and substantial losses from investments and sales of distressed financial institution securities. Revenue rose 8% to $7.72 billion.
Analysts surveyed by Thomson Reuters, on average, had estimated third-quarter earnings of $1.77 a share, on revenue of more than $7.8 billion.
Total medical membership declined 10.5% year over year to 10.3 million. Commercial membership declined 3.6% year over year to 3.4 million, while Medicare Advantage membership grew 10.7% to 1.5 million.
Companywide, medical costs as a percentage of premium revenue, or the medical cost ratio, decreased to 82.1% from a 83.1% a year earlier, driven by a decline in the government segment that was partly offset by the increase in the commercial business.
Humana reaffirmed its 2009 earnings guidance of approximately $6.15 a share, with Medicare Advantage membership growth now anticipated to be higher and commercial membership declines deeper than previously forecast.
Humana forecasts 2010 per-share earnings of $5.05 to $5.25, falling short of the $5.36 Thomson Reuters estimate, with revenue of $32 billion to $34 billion, compared to the Street view of $29.6 billion. Goldman Sachs, however, said the EPS forecast is nearly in line with Street views excluding exit costs associated with a military contract that the company may lose.
Wells Fargo analyst Matt Perry attributed the difference between Street and company outlooks for next year to the commercial segment, with Humana expecting its corporate health plans to make a smaller contribution to profit than Perry had projected. Humana expects commercial enrollment to decline by 200,000 this year and 135,000 to 145,000 next year.
The company expects substantial Medicare Advantage membership growth in 2010, a lower Medicare operating margin and more stable commercial operating results due to overhead-cost reductions and ongoing pricing actions.
Meanwhile, Humana's protest -- recently upheld by the Government Accountability Office -- of its loss of a regional Tricare military managed-care contract means the company should keep the business at least through September 2010, rather than losing it on April 1, executives said.
Humana said it doesn't know yet what the Defense Department will do about the contract in response to the GAO's action, and 2010 guidance doesn't anticipate Humana's keeping the business beyond the third quarter.
The Defense Department awarded the contract to competitor UnitedHealth. The pact accounts for an estimated 6.5% of Humana's 2009 pretax income, according to Moody's Investors Service.
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@dowjones.com