Humana Shares Fall as UBS Challenges 2008 Forecast
By Avram Goldstein
Bloomberg News
Oct. 29 (Bloomberg) — Humana Inc., the No.2 provider of U.S.-sponsored health plans, fell the most in a month after an analyst downgraded the stock, saying the company may not reach a newly announced forecast for 2008.
Humana’s third-quarter earnings rose 90 percent, including a $69 million one-time gain before taxes, the Louisville, Kentucky-based Humana said today. Humana derives about two- thirds of its profit from the Medicare program, which pays premiums for elderly and disabled Americans to receive coordinated care and discounted drugs.
Justin Lake, an analyst at UBS Securities in New York, downgraded Humana to “sell” from “neutral,” saying the company’s 2008 enrollment forecast of at least 200,000 added Medicare customers is optimistic, and that the profitable government payments can’t last. Members of the U.S. Congress and consumer groups said the amount of profit was excessive.
“We continue to see this operating environment as temporary, and now that strong earnings/guidance are behind us, investor focus is likely to shift to potentially unsettling items,” including efforts by presidential candidates and members of Congress to trim Medicare payments, Lake said in a note to clients today.
Lake recommended investors “take advantage of current enthusiasm and sell into strength.”
Third-quarter net income climbed to $302.4 million, or $1.78 a share, from $159.2 million, or 95 cents, a year earlier, the company said in a statement. Excluding a $69 million one- time gain before taxes, profit beat analysts’ estimates, as did revenue.
Stock Turnaround
Humana fell $1.81, or 2.4 percent, to $73.75, at 4:01 p.m. in New York Stock Exchange composite trading, after being up as much as 7.9 percent earlier in the day. The company has climbed 33 percent this year, leading the six-member S&P 500 Managed Health Care Index.
“Humana’s Medicare Advantage program continues to fleece taxpayers, even as the company spends less and less on seniors’ actual health care,” said Representative Pete Stark, a California Democrat who chairs the Ways and Means health subcommittee, in an e-mail. “The company’s quarterly results confirm what I’ve been saying for years — overpayments to private plans benefit shareholders, not patients.”
Medicare will pay U.S. insurers $76.3 billion in health- plan premiums in 2007, about $9.2 billion more than the federal agency would pay for direct coverage of the same population, according to government estimates.
Analysts’ Estimates
Profit excluding some items beat the $1.49-a-share average of 16 analysts surveyed by Bloomberg. Revenue rose to $6.32 billion, surpassing the average expectation of $6.11 billion.
The 90 percent gain in third-quarter net income compared with increases of 15 percent reported for UnitedHealth Group Inc., of Minnetonka, Minnesota; 7 percent for Indianapolis-based WellPoint Inc.; and 4.3 percent for Aetna Inc. of Hartford, Connecticut.
The company, in a statement today, raised its earnings forecast for the full year 2007 to $4.75 to $4.80 a share, up from a July 18 outlook of $4.40 to $4.50.
The revised target includes a one-time third-quarter gain of 25 cents a share generated mostly by its drug plan for the elderly. Humana said the $69 million pretax gain came partly from recording as income money it had set aside earlier, and didn’t actually need, to pay to Medicare.
Forecast
Humana gave its first 2008 outlook, forecasting $5.30 to $5.50 in earnings per share, compared with the $5.19 average estimate in a Bloomberg survey.
America’s Health Insurance Plans, a trade group based in Washington, has urged Congress to leave the rates alone. Last week it paid for Advantage members to visit Capitol Hill from across the U.S. to urge lawmakers to back off.
Humana investors shouldn’t wobble under the political pressure, said Chief Executive Officer Mike McCallister during a conference call today.
“If a headline out of Washington that says they’re looking at cutting funding to Medicare Advantage bothers you, then you’re probably in the wrong stock, because it’s going to be like this the rest of our time here,” he said.
Gross Margins
In the third quarter, premium revenue in the Medicare Advantage managed-care plan grew 19 percent from a year earlier to $2.8 billion, outstripping a 15 percent enrollment gain.
Medicare Advantage plans generate annual gross margins of about $1,650 per Humana beneficiary, more than 10 times the profit from drug plans, said Carl McDonald, an analyst with CIBC World Markets in New York. Gross margin is revenue minus the cost of goods or services.
In the third quarter, Humana’s ratio of medical expenses to premiums from Medicare health plans decreased to 81.3 percent from 84.1 percent a year earlier, helped by the $69 million one- time gain.
Taxpayers should question why Medicare is rewarding Humana with a “hand-out” and “blockbuster profits” as the program plans physician-fee cuts, said American Medical Association board member Ardis Hoven in an e-mail.
The Medicare Rights Center complained that Humana will raise premiums 69 percent for its 2008 discount-drug plans for 2.1 million of its more than 3 million members and that Advantage plans are overpaid.
“Humana has exploited the Medicare market with great business skill, but its services to beneficiaries leave much to be desired,” said Bob Hayes, the president of the New York- based group.
To contact the reporter on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net .