Humana Inc. posted a 35 percent surge in second-quarter profit Monday, easily beating Wall Street views, as more people enrolled in the health insurer's Medicare plans while existing members made less use of its health care services.
The company, which has branched out into health care delivery, also raised its earnings forecast for the full year to a range of $7.50 to $7.60 per share, up from $6.70 to $6.90 per share. Analysts polled by FactSet predict, on average, an annual profit of $7.02 per share.
Wall Street shrugged off the company's robust performance, however, sending down Humana's shares along with the rest of the market.
Louisville-based Humana credited its rosier outlook to a favorable trend in which a smaller percentage of premium dollars from its members are going to pay for medical claims, reflecting an industrywide slowdown in health care utilization.
The company said those lower costs will be partly offset by higher spending on sales and marketing campaigns in coming months to promote its key Medicare plans, which account for slightly more than half of its overall revenue.
Humana shares fell $2.22, or 3 percent, to close Monday at $72.36. The downturn came as investors weighed possible repercussions from looming deficit reductions by Congress as part of a deal to avert the nation's financial default. Medicare could end up among the targets, including subsidies to insurers that offer an alternative to government-run Medicare.
"With the open-ended nature of this legislation, and the potential for large cuts to health care spending, we believe health care services will be one of the losers," Oppenheimer analyst Michael Wiederhorn said in a research note.
Elsewhere, Credit Suisse analyst Charles Boorady said in a note that Humana's strong results should mitigate concerns among investors. He said Humana would benefit from federal deficit-reduction talks that result in more people shifting to managed care "to achieve better value for the money and higher quality care."
Humana CEO Michael B. McCallister said the company now sees opportunities to expand its 2012 Medicare businesses "a little more aggressively than we thought possible 90 days ago."
"The results we announced this morning bode well for an excellent 2011 and give us the latitude to accelerate the kind of investments likely to produce an even better 2012," McCallister said in a conference call with industry analysts.
The slowdown in the use of health care services has helped spur strong performances by managed care companies. Analysts say consumers tend to cut back their use of health care after a recession by delaying elective procedures or skipping doctor visits.
Goldman Sachs analyst Matthew Borsch said in a note that Humana's results show medical cost trends remain a "dominant theme" for the sector.
"Our view remains that medical cost trend will remain moderate through 2013 but within that framework, there is room for some stabilization in health care utilization relative to (an) exceptionally low trend in 2010, which is bullish for managed care," Borsch wrote.
For the three months ended June 30, Humana earned $460.3 million, or $2.71 per share. That compares to nearly $340.1 million, or $2 per share, last year. Revenue in the just-ended quarter was up 8.1 percent at $9.28 billion.
Adjusted income, which excludes the impact of favorable prior-year medical claims reserves, was $2.50 per share.
The performance beat Wall Street forecasts by a wide margin. Analysts predicted, on average, earnings per share of $2.05 on $9.28 billion in revenue.
Humana reported that quarterly pretax income from its retail segment totaled $503.1 million, up from $325.9 million a year ago, as its individual Medicare Advantage membership rose 10 percent to 1.6 million members at the end of the second quarter.
Medicare Advantage plans are government sponsored, privately-run programs offering comprehensive health coverage for seniors. It's become a lucrative venture for Humana _ the second-largest provider of Medicare Advantage plans.
Membership in Humana's stand-alone Medicare prescription drug plans was up 41 percent from a year ago at 2.4 million members. Humana credited the upswing in part to teaming with retail giant Wal-Mart Stores Inc. to offer a Medicare prescription drug plan.
Membership in its individual specialty plans including vision and dental coverage was up 55 percent from a year ago.
Pretax income for its employer group segment was essentially flat at $108.4 million, compared to $107.8 million a year ago.
Group Medicare Advantage membership totaled 309,700 at the quarter's end, up 4 percent from a year ago. Group fully-insured commercial medical membership declined by 8 percent to nearly 1.2 million.
Humana reported a 73 percent surge in pretax income from its health and well-being services segment.
The increase was due to growth in the company's pharmacy business along with its recent acquisition of health care company Concentra Inc., which provides occupational medicine, urgent care, physical therapy and wellness services.