Humana Posts 34% Profit Hike on Lower Medicare Drug Expenses

By Fran Matso Lysiak, senior associate editor, BestWeek
A. M. Best
August 4, 2009

As Humana Inc.'s second-quarter net income jumped 34%, the chief of the U.S. health insurer said that addressing the pending Medicare funding deficit should become a focal point in federal efforts to reform the health care system.

Net income rose to $281.8 million from $209.9 million the same period a year ago, when claims expenses were much higher in its stand-alone Medicare Part D prescription drug plans for seniors.

Pretax income in its main government segment jumped 62% to $404.7 million, mostly driven by the lower drug plan claim expenses, a 13% increase in average membership in its more comprehensive Medicare Advantage plans and implementing member premiums for most of these plans.

"Our government segment as a whole performed well in the quarter," said Michael B. McCallister, Humana?s president and chief executive officer, during the company's Aug. 3 conference call. However, in its commercial health insurance business, "pressures from the general economy were evident in our results, primarily in our small group business," he said.

Louisville, Ky.-based Humana (NYSE: HUM) is one of the biggest sellers of private Medicare Advantage and drug plans for seniors in the United States.

Seniors enrolled in its Medicare Advantage plans grew to nearly 1.5 million, a 12% gain, and included members added through acquisitions completed last year. Seniors enrolled in its drug-only plans, though, dropped sharply to 1.9 million from 3.1 million, as a result of low-income seniors joining a competitor's less expensive plan and drug plan members switching to Medicare Advantage plans.

Total revenue rose 7.5% to $7.9 billion.

Turning to efforts at reforming the U.S. health system, McCallister said Humana continues to work closely with the Obama Administration and Congress "to increase the likelihood that measures designed to solve the real problems" in the system -- rising costs of care associated with the deteriorating health status of Americans, the lack of interconnected electronic systems and the impending Medicare funding deficit -- "become the focal points for national health care reform efforts."

Both Medicare payment reform and health reform, more broadly, "are still very fluid processes," McCallister said. "While Washington debates a number of proposals and struggles to put forth any sort of bill, we continue to focus relentlessly on reducing costs and investing in improved health outcomes for our members."

The company, however, has planned for a changed Medicare payment environment, he said. Among other initiatives, Humana is building its HMO and PPO provider networks and has developed several clinical management programs that reduce costs and improve seniors' health, McCallister said.

The Medicare Advantage program "is vital to any solution" to Medicare's pending insolvency because it is the only place where seniors have access to cost-containment measures that also improve their health, he said. "Any payment reform proposals that have the effect of pushing seniors back into original Medicare can only exacerbate the program's fiscal crisis."

Over the next few weeks, Congress and the Administration "will learn how deeply these seniors are attached to Medicare Advantage and how much they will resent any misguided reform efforts that, by reducing payments to Medicare Advantage contractors, will have the inevitable effect of raising their premiums and cutting their benefits," McCallister said.

Earlier this year, experts predicted massive, across-the-board payment cuts to Medicare Advantage plans would be a virtual certainty under President Obama and the Democratic-led Congress (BestWire, Jan. 12, 2009).The billions in cuts would be in addition to ones Congress enacted last year to MA private fee-for-service plans, which essentially means those plans would be gone by 2011, an expert said (BestWire, Aug. 18, 2008).

Meanwhile, Humana Military Services, a unit of Humana, filed a protest with the Government Accountability Office regarding the recent U.S. Department of Defense award of the south region TRICARE contract to UnitedHealth Military & Veterans Services, a new unit of UnitedHealth Group (BestWire, July 14, 2009). The TRICARE health plan serves active-duty and retired military service members and their families.

Humana Military operates as a stand-alone business unit, so if the protest is unsuccessful, any "wind-down costs will not affect our core businesses," McCallister said.

Humana Health Plan Inc. currently has a Best Financial Strength rating of A- (Excellent). It is the third-largest U.S. health insurer based on 2008 premium revenue, according to an A.M. Best Co. special report "2008 GAAP Financial Review," published May 4.

On the early afternoon of Aug. 3, Humana's stock was up 4.29% from the previous close, trading at $34.26 a share.

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