Humana Inc.'s (HUM) second-quarter earnings rose 34% as strong results in the health insurer's Medicare business offset declining enrollment and cost pressures in its commercial segment.

The Louisville-based company also affirmed its 2009 earnings outlook while slightly increasing the forecast for costs in its commercial health plans.

Humana shares recently traded up 59 cents, or 1.8%, to $33.44.

"Humana's 2Q09 results reflect significant improvement in the government sector driven by higher margins in the Medicare and [prescription drug plan] book of business," Credit Suisse Group analyst Gregory Nersessian said. He added that the positive momentum in the government segment was offset partially by disappointing commercial-segment results, hurt by membership losses, higher administrative expenses and higher medical costs.

While Humana's government sector performed well, the company, which derives a majority of its business from Medicare Advantage health plans, is looking to diversify, Humana President and Chief Executive Michael McCallister said during a conference call. Humana's business composition makes it more exposed than other major insurers to potential cuts in Medicare reimbursements.

"Clearly we would like to be more diversified than we are," McCallister told analysts, and noted that Humana has acquired dental, vision, behavioral health and other businesses. Being so "upside down" isn't good for the company, he said.

"We're constantly looking at opportunities, we are constantly assessing the usual suspects out there in terms of opportunities for larger scale activity," McCallister said. "We will be thoughtful, we will be strategic, we understand what options we have and we will take a rational approach," he said, declining to be more specific on a time frame.

Humana and other health insurers remain under pressure from rising medical costs and declining commercial enrollment - trends that are only exacerbated by the effects of the recession, notably layoffs. They also anticipate cuts in their payments from the Medicare program, and uncertainty on the outcome of U.S. health-overhaul efforts, in which Democratic political leaders are pushing a public-health-plan option that the industry opposes.

Humana edged up its forecast for commercial medical costs, which the company expects to increase by some 7% this year, citing the aging population and effects of the economy. Like some of its peers, Humana is seeing patients use more medical services as they anticipate layoffs and loss of health insurance, and has noticed health providers ordering more services for patients.

The company reported a second-quarter profit of $281.8 million, or $1.67 a share, compared with $209.9 million, or $1.24 a share, a year earlier. The company in April projected earnings of $1.65 to $1.70 a share, above analysts' estimates at the time.

Revenue increased 7.5% to $7.9 billion. Analysts polled by Thomson Reuters most recently were looking for $7.77 billion.

Humana's medical cost ratio - the percentage of premium revenue used to pay medical bills - declined to 83.3% from 85% a year earlier. The company's total medical membership fell 10% to 10.3 million year over year, and was essentially flat from the prior quarter.

Medicare Advantage membership was up 4% year-to-date, while commercial-segment membership was down 5% year to date in spite of gains in individual-plan enrollment.

Pretax profit in the government segment surged 62% while pretax profit in Humana's commercial business slumped 53%, in part on lower investment income.

For the third quarter, the company expects earnings of $1.75 to $1.80 a share, while analysts were looking for $1.78. The company affirmed its 2009 per-share earnings outlook of $6.10 to $6.20, excluding the effect of future share repurchases and potential charges associated with the loss of the Tricare military contract next year. Humana is protesting the loss of that contract.

Oppenheimer analyst Carl McDonald noted that Humana's medical claims payable rose $170 million sequentially, resulting in a 1.5 day increase in days claims payable and suggesting a possible strengthening of reserves.

"This increases our conviction in Humana's ability to meet or beat EPS guidance in the second half of the year," McDonald said.

-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285;

(Tess Stynes and George Stahl contributed to this report.)