HUMANA: Sees Unexpected First Quarter Loss
"Resurrecting concerns about whether managed care companies do much real managing, starting with their own businesses," Humana Inc. said yesterday that its profits would fall well short of expectations, due both to industrywide trends and factors specific to the company. The company was "surprised by a 20% surge in prescription drug costs and substantial increases in the length of hospital stays and visits to emergency rooms" (Freudenheim, New York Times, 4/9). A recent estimate by First Call Corp. put Humana's projected earnings for the first quarter at 34 cents a share. But the HMO said it now expects earnings of only 20 to 24 cents per share (Investor's Business Daily, 4/9). The Wall Street Journal reports that in addition to a 25% loss by Humana on Wall Street yesterday, other insurers such as PacifiCare Health Systems Inc. and WellPoint Health Networks Inc. took hits, largely due to fears over increased medical costs. Todd Richter, an analyst with Nationsbanc Montgomery Securities, said, "It was a massacre because the Humana warning has a root cause, which is health care cost trends." But the news from Humana is largely reflective of its recently renegotiated contract in Florida with Columbia/HCA Healthcare Corp., for use of its hospitals. Humana expects to record an additional $90 million charge in the first quarter as a result of the deal (Carrns, Wall Street Journal, 4/9. While terms of the agreement were not disclosed at the time, the $350 million deal included a 15% increase in Columbia's fees for Humana, as well as a $5 million payment to Columbia "to resolve disputes lingering from the previous contract between the companies." Still, Humana CEO Gregory Wolf said, "We did the best thing for our members" (Galewitz, AP/Nando Times, 4/8).
Righting the Ship
Wolf said Humana's "modest 2.7% profit margin ... would continue to deteriorate in the second and third quarters before rebounding in the fourth" (New York Times, 4/9). But, he added, "Notwithstanding the hard decisions we made this quarter, our business is fundamentally sound and we remain confident in our ability to successfully meet the challenges our industry will face" (Authers, Financial Times, 4/9). To offset the new costs, Humana plans to continue raising rates for its health plans, after bumping them up between 11% and 16% already this year. Reduced government payments for Medicare will also be "passed along to Medicare beneficiaries in reduced benefits next year" (New York Times, 4/9). Spokesperson Greg Donaldson said the company may "develop a three-tier pharmacy pricing system where policyholders buying generic drugs will pay less than those using high-cost brand name products." He said, "There is nowhere to go to reclaim that increase except to charge higher premiums and reduce benefits" ( Florida Times-Union, 4/8).