Humana Profit Falls After Booking Medicare Costs
By: Administrative Account | Source: Bloomberg
May 1, 2006 6:28AM EST

May 1 (Bloomberg) -- Humana Inc. said first-quarter earnings fell 22 percent after it incurred costs to become the second- biggest seller of insurance plans for a new U.S. drug benefit. Net income fell to $83.7 million, or 50 cents a share, from $106.7 million, or 65 cents a share, a year earlier, the Louisville, Kentucky-based insurer said today in a statement. A Thomson Financial survey estimated earnings per share of 43 cents. Revenue rose 39 percent to $4.7 billion. Humana will experience ``earnings compression'' through the first half of the year because of costs related to the new Medicare prescription benefit for the elderly and disabled, said Chief Financial Officer James Bloem in a Feb. 6 call with investors. The company, which increased its medical membership by 32 percent in the first quarter, raised its full-year earnings outlook. ``Humana has made a good bet,'' said Peter Costa, an analyst with FTN Midwest Securities Inc., who has a ``buy'' rating on the shares and doesn't own them. ``Medicare is one of the biggest opportunities for insurance companies.'' The company increased its full-year earnings per share forecast to $2.82 to $2.88 per share. For the second quarter, the company sees earnings per share of 31 cents to 36 cents. Shares of Humana rose $1.79, or 4.1 percent, to $45.18 on April 28 in New York Stock Exchange composite trading. They have risen 39 percent in the 12 months previous to today. Humana is second only to the biggest U.S. health insurer, UnitedHealth Group Inc., in gaining new customers from the drug program, Medicare said in an April 28 release. UnitedHealth, based in Minnetonka, Minnesota, added 3.8 million customers. UnitedHealth UnitedHealth made a $9 billion purchase of PacificHealth last year to gain share in the expanding market for delivering services subsidized by Medicare, Costa said. Humana has long focused on this market, and now is trying to use that experience to gain new customers, he said. Medicare separately pays for services such as hospital stays and doctors' visits. Humana had 792,500 customers enrolled in program where the company administers the entire Medicare health benefit, including the drug plan, as of April 27, according to government figures. It lags UnitedHealth and the non-profit insurer Kaiser Permanente in this category. Humana's efforts to boost the Medicare plans have included sending a fleet of recreational vehicles to Wal-Mart stores. Humana has competition for its Medicare Advantage plans, which manage all of the benefits offered by the federal plan for the disabled and people 65 and older, from a new drug subsidy. Profit Humana said on Feb. 6 that first-quarter profit would be 50 cents to 55 cents a share, less than the 61-cent average estimate of analysts found in an earlier poll by Thomas Financial. Thomson Financial's current polling of 12 analysts had an average estimate of 43 cents a share. The company also said then that it would have a capital gain in the first quarter on the sale of an investment. Matthew Borsch, an analyst with Goldman Sachs, said in an April 24 telephone interview that this may add 11 cents a share to net income in the first quarter. In the year-earlier period, the company reported a tax gain of 14 cents a share. Aetna Inc.'s first-quarter results, announced April 27, served as a ``wake-up call'' for investors about rising competition in the health insurance industry, said Beth Senko, an analyst with Williams Capital in New York. Aetna's shares plunged as it increased the amount of each $1 in premium spent on health care to 80 cents from 75 cents. Aetna Inc.'s shares dropped 20 percent on April 27, the most in more than five years. (Humana will hold a conference call about first-quarter results at 9 a.m. Dial 888-625-7430 to listen in.)

To contact the reporter on this story: Kerry Young at kdooley@bloomberg.net Last Updated: May 1, 2006 05:36 EDT