LOUISVILLE, Ky. (AP) — A downturn in Humana Inc.'s second-quarter results and net income forecast for the year did not cause skittishness among industry analysts, but they sounded concerns about the health insurer's higher costs and margins from its key Medicare Advantage business.
Posting its earnings a week early, Humana on Monday pointed to higher Medicare Advantage costs and increased health care use by its plan members for a 23 percent drop in its second-quarter net income.
Jefferies analyst David Windley, in a note to investors, pointed to Humana's reliance on its Medicare Advantage business as an ongoing plus because "member growth opportunities are more robust." Medicare Advantage plans offer privately run, government-subsidized comprehensive health insurance for seniors with extras like vision or dental coverage in addition to basic Medicare coverage.
"We expect that, plus Humana's share repurchase capacity, to mitigate downside to some degree," Windley wrote.
He said a 10 percent decline in Humana's stock value in the last month showed that investors were braced for some of the bad news.
"We are disinclined to chase the horse out of the barn Tuesday, but will collect more insight on cost progression," he said. "Hold the course."
Still, the stock sold off Tuesday morning, shedding 9.3 percent, or $6.58, to $63.97. Shares are down 27 percent in the year to date.
Humana downgraded its full-year earnings forecast to a range of $6.90 to $7.10 per share in 2012, down from its previous estimate of $7.38 to $7.58 per share. Revenue is expected between $39 billion and $39.5 billion.
The Louisville-based company said its second-quarter net income dropped 23 percent to $356 million, or $2.16 per share. That's compared to $460 million, or $2.71 per share, in the prior-year period.
Revenue rose 4 percent to $9.7 billion from $9.28 billion.
Analysts expected a profit of $2.23 per share, excluding one-time items, and $9.86 billion in revenue, according to FactSet.
Windley said the upswing in outpatient costs came as no surprise, noting that Humana's competitors have faced the same trend. Last week, WellPoint Inc., the nation's second-largest health insurer, surprised Wall Street by cutting its 2012 forecast after medical costs spiked in May.
"The bigger surprise is that still declining inpatient volumes cannot fully offset that, and management had eaten into guidance cushion that much," Windley said of Humana's second-quarter performance and earnings forecast.
Typically, earnings shortfalls coming after the submission of Medicare bids in early June mean that Medicare margins will fall short of expectations the following year as well, said Citi analyst Carl McDonald in a research note.
"In Humana's situation, the company is making the case that their 2013 bids included enough conservatism that they can still earn a 5 percent margin next year, even factoring in the higher cost trends experienced this year," he wrote.
"Put differently, back in June, it appears Humana thought their margin in 2013 would be 5.5 percent or higher, whereas they now expect it above 5 percent."
He noted that Humana's revised full-year earnings forecast assumes that higher costs will continue into the year's second half.
"We like that Humana isn't assuming any cost improvements in the forecast; the weakness is that it sounds like June was the worst month so far this year for Humana," McDonald wrote.
"If cost trend continues to run at the higher June level, that could be a problem, since guidance may be based on the lower trend Humana saw for the first six months of the year, rather than on the higher cost trend specifically observed in June."