Humana CEO sees Medicare market share rising

NEW YORK Mon Mar 7, 2011 7:32am EST

Humana Inc.,a Fortune 100 company that markets and administers health insurance, CEO Michael McCallister stands for a portrait in New York March 4, 2011. REUTERS/Shannon Stapleton

Humana Inc.,a Fortune 100 company that markets and administers health insurance, CEO Michael McCallister stands for a portrait in New York March 4, 2011.

Credit: Reuters/Shannon Stapleton

NEW YORK (Reuters) - With its focus on Medicare plans for the elderly, Humana Inc (HUM.N) believes it can grow with the wave of aging baby boomers without moving far afield from its main customer base of seniors.

Humana Chief Executive Officer Mike McCallister said he plans to avoid several other tactics adopted by rivals such as Aetna Inc (AET.N) and Cigna Corp (CI.N). Those moves include moving deeply into Medicaid plans for the poor, outsourcing pharmacy operations or aggressively expanding internationally.

The CEO also suggested Humana investors should not expect a dividend any time soon even as rivals start payouts or increase them.

Instead, the country's second-biggest provider of private Medicare Advantage plans to grow even bigger as McCallister says the new Medicare rules from the U.S. healthcare overhaul mean large companies such as his stand to gain further.

"The demographics are good; the market is going to grow; the government needs the help," McCallister said in an exclusive interview with Reuters on Friday. "I think there are companies in Medicare that are going to grow and we are going to be one of them."

Humana holds a 16 percent market share in Medicare Advantage with about 1.9 million members, according to a recent report from Stifel Nicolaus. The plans amounted to 57 percent of the company's $33.87 billion in revenue last year.

Small companies may struggle to meet the new rules, including those that will require the plans to spend at least 85 percent of Medicare premiums on medical costs starting in 2014, McCallister said.

"There's going to be a big need for big scale to deal with the rules that were written," McCallister said.

"So if you're asking me whether that market share percentage is going up or not, the answer is yes, it is going up," he said, adding he expects some of that growth will likely come through acquisitions.

In the wake of the reform law, some insurers see international markets as an enticing way to expand. McCallister said the company opened an office in China, but "I don't have any real aggressive initiatives under way internationally.

"We're going to stay very focused on what our opportunities are and things like that sometimes can become a distraction if you're not careful," the CEO added.

HOME HEALTHCARE NEXT?

Since the start of 2010, Humana shares have risen 46 percent, outperforming its large health insurer rivals, which have also posted sharp gains over that time. This year, Humana shares are up 17 percent.

The stock rise reflects investors becoming more comfortable with the outlook for Medicare, but many still remain concerned government cuts will undermine Humana's business in the years ahead.

Even as it is bullish on Medicare, Humana is seeking some diversification. Its recent $790 million acquisition of Concentra, which runs medical care and workplace health clinics, led the company into the business of providing care.

McCallister said the company could make further inroads in that direction, as it has interest in possibly acquiring companies that deliver home healthcare services.

Like the Concentra deal, home healthcare would add diversification, while also having the potential to deepen Humana's relationship with the elderly.

"Is that something that we should be a part of? I think the answer to that is yes, because it's a different regulated business again, but it's also something that broadens our relationship with these seniors," McCallister said.

Speaking generally about acquisitions, McCallister said the company has the ability to pay more than it did for Concentra.

"We can go higher," he said. "We haven't quoted a number, but we can do things bigger than that."

Aetna and UnitedHealth Group Inc (UNH.N) recently increased their dividends substantially, while WellPoint Inc (WLP.N) said it would start paying one out -- moves that came after some shareholders agitated for them.

McCallister, however, said the company may need its cash for strategic reasons.

"I've watched the people starting dividends," McCallister said. "Those tend to be the behaviors of non-growth companies. I still consider us a pretty significant growth company."

In November, Humana became the first health insurer to give a detailed 2011 forecast, forecasting its earnings would fall sharply this year. However, it raised its forecast since then to the current $5.95 to $6.15 per share from its initial range of $5.35 to $5.55 per share.

In recent weeks, the stock has been propelled by better-than-expected proposed payment rates for Medicare next year and the company winning a military health insurance contract that it initially lost.

Investors are also concerned about the impending results of a government audit of potential payment errors involving Medicare plans generally. McCallister said he hoped the audit would be resolved in the next few months.

McCallister, who at 58 is an avid golfer and skier, has worked for Humana for 37 years, the last 11 as CEO.

That makes him easily the longest-tenured chief of any of the major health insurers.

"I'm way past my sell date if you look at the average tenure," he joked. "I've got retirement on the horizon, but it's not in the near horizon."

(Reporting by Lewis Krauskopf; editing by Richard Chang, Gerald E. McCormick and Andre Grenon)

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