November 18, 2010 / 4:12 PM / 9 years ago

Humana sees drop in profit for 2011

NEW YORK (Reuters) - Health insurer Humana Inc (HUM.N) projected sharply lower profit next year as it expects more Americans to return to the doctor’s office and sees lower margins in its Medicare plans.

Humana’s outlook was the first detailed view of 2011 from the major U.S. health insurers, whose results have consistently topped expectations this year, and includes a projected impact on implementing a new U.S. healthcare law.

Shares in the company fell as much as 6 percent after it issued the forecast at a half-day analyst meeting, but recouped some of those losses to trade 2.7 percent lower on Thursday afternoon.

Chief Executive Officer Michael McCallister pointed to long-term opportunities in Medicare because of the aging U.S. population and in the market for individual health plans after the recently passed healthcare overhaul. Humana is one of the largest Medicare providers for the elderly.

“Management was very optimistic about their medium- and long-term future,” Sanford Bernstein analyst Ana Gupte said. “The company sees itself as a leader in Medicare Advantage, which was articulated to be more of a growth story than the market perceives.”

Gupte and other analysts said the forecasts could be conservative. About a year ago, Humana also projected a drop in annual profit, but is on track to end 2010 well above that.

“We expect the company to ‘beat and raise’ into 2011,” Gupte said.

Humana expects 2011 earnings per share of $5.35 to $5.55 and backed its previous 2010 EPS view of $6.40 to $6.50.

Humana shares were off $1.56 to $56.49 after falling as low as $54.59. The shares were up 32 percent through Wednesday, compared with an 11 percent increase for the Morgan Stanley Health Care Payor index .HMO of health insurers.

PROFIT BREAKDOWN

Humana projected a 40-cent cut in earnings per share in 2011 from medical cost trends returning to normal levels, as patients who postponed doctor visits and medical procedures during the worst of a U.S. economic downturn find they can no longer skimp on healthcare.

A bigger hit — 80 cents per share — is expected from the company’s Medicare margins falling to their target level of about 5 percent. The company expects a pretax operating margin of about 6.5 percent for the business this year, when it benefited more from its ability to manage medical costs below that of government-run Medicare.

Such programs include those that coordinate care for patients to eliminate unnecessary doctor visits, or networks that focus on physicians and hospitals found to be efficient.

Humana projected that costs from the healthcare overhaul would hurt earnings by 15 cents per share, mostly due to new requirements that insurers spend a certain amount on medical costs as opposed to administrative expenses or profit.

Countering the expected declines, Humana is projecting a gain of about 40 cents per share from membership additions in Medicare. It forecast that its Medicare Advantage enrollment would rise by 60,000 to 65,000 next year. It reported 1.76 million members as of September 30.

Humana expects growth in its pharmacy and specialty businesses to boost results by 30 cents per share next year.

While some rival insurers have outsourced or sold their pharmacy benefit businesses, McCallister said such a move was “not logical” for Humana as it expects that business to grow.

“We have every intention of keeping our PBM,” he said.

MEDICARE BOOM

During the analyst meeting, McCallister provided an overview of the Medicare landscape, including the need to bring down costs in the government health program and the natural growth potential stemming from an aging baby boom generation.

“We know the growth is ahead of us and in fact is going to be accelerating over time,” McCallister told the meeting. He called that Medicare growth from the demographic changes “remarkable and unstoppable.”

Humana predicted that U.S. government payment rates for Medicare plans will rebound, potentially as soon as 2012, from low levels in 2010 and 2011, as the government adjusts for higher medical cost trends.

The CEO also cited opportunities for Humana in the market for insurance sold directly to individuals, which may proliferate in the wake of the new healthcare law.

Asked about his vision for Humana in five or 10 years, McCallister said it was possible the company could get back into the business of delivering care, such as running ambulatory surgical centers.

Reporting by Lewis Krauskopf. Editing by Lisa Von Ahn, Dave Zimmerman, Derek Caney and Robert MacMillan

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