July 30, 2012 / 8:26 PM / in 5 years

Humana cuts view, cites costly new Medicare members

(Reuters) - U.S. health insurer Humana Inc reported a lower-than-expected quarterly profit and cut its forecast for the year, admitting it had been blindsighted by costs associated with surging membership in its individual Medicare Advantage programs.

Shares of Humana fell nearly 12 percent in after-hours trading after the company said the numbers of new Medicare Advantage members - which create considerable initial costs that decline over time - had grown far more than expected in 2012.

“I think we have an unusual situation with all these numbers, a number of perfect storm things coming together,” Chief Executive Michael McCallister said during a 90-minute conference call with analysts who expressed surprise Humana had not seen the problem coming earlier in the year.

Humana said the number of individual Medicare Advantage members who went for wellness visits has doubled this year, and the number who received physical exams has risen by more than 20 percent.

McCallister, in fielding analyst questions, said the company had a good track record of projecting earnings and gauging Medicare Advantage trends.

“We’ve generally been able to project well,” the chief executive said. “This company understands what goes into Medicare. I’d rather be us than anybody else in this space.”

The company said it had almost 1.9 million individual Medicare Advantage members at the end of June, an 18 percent increase from the year-earlier number.

It said the magnitude of costs associated with the swelling membership did not become clearly apparent until July, as Humana assessed expenses incurred from the prior month. Just weeks earlier, the company had reaffirmed its earlier 2012 profit view.

Humana reported second quarter earnings of $356 million, or $2.16 per share, down from $460 million, or $2.71 per share, a year ago. The current quarter results included an expense of 18 cents per share from a legal settlement and a gain of 15 cents per share from medical claim reserves.

On an adjusted basis, Humana earned $2.19 per share, below the average Wall Street forecast of $2.28 per share according to Thomson Reuters I/B/E/S.

Revenue rose 4 percent to $9.7 billion.

Humana cut its earnings per share forecast for 2012 to between $6.90 and $7.10 from a previous estimate of $7.38 to $7.58.

“Our company’s strategy is sound, though we are disappointed by the need to lower our full-year earnings guidance,” McCallister said in the company’s earnings report, adding the company was taking action to restore growth.

Humana shares fell to $62.39 in extended trading on the New York Exchange from a close of $70.55.

Reporting by Michele Gershberg; Editing by Bernard Orr and Richard Chang

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