March 12 (Bloomberg) -- Humana Inc., the second-largest seller of Medicare drug plans, followed rival WellPoint Inc. in cutting its 2008 forecast as prescription costs jumped. Humana fell 14 percent, and the selloff of other insurers continued.

Humana said expenses soared when it lowered how much patients pay for medicines in a bid to lure new customers age 65 and older into its Medicare prescription plans. Humana is racing to grab market share from UnitedHealth Group Inc., the largest seller of the U.S.-backed drug plans, analysts said.

Insurers are struggling to lure new members to boost earnings without letting medical costs outstrip premiums. Humana's price cuts attracted sicker than expected members into its Medicare plans, the company said today. In WellPoint's case, members of employer-sponsored plans are rushing to get elective care in the face of a declining economy, analysts said.

``Humana priced their drug plan too low in order to gain market share, and we're seeing the result of that today,'' said Sheryl Skolnick, a CRT Capital Group analyst in Stamford, Connecticut, in a telephone interview. ``They are offering a plan with zero co-pays for a 90-day supply of generics through RightSource, their mail-order. And when you tell seniors something is free, they keep coming back again and again.''

The Standard & Poor's 500 Managed Health-Care Index has fallen 24 percent the past five days of trading, and is at its lowest level since Jan. 4, 2005.

Shares Decline

Humana, of Louisville, Kentucky, fell $6.50 to $40.88 at 4 p.m. in New York Stock Exchange composite trading. The stock has dropped 40 percent since the start of March. UnitedHealth, of Minnetonka, Minnesota, dropped $1.56 cents, or 4.1 percent, to $36.68 and Indianapolis-based WellPoint declined 81 cents, or 1.7 percent, to $46.45.

UnitedHealth said in a statement that industry factors were putting ``pressure'' on earnings. The company in its statement neither changed nor reaffirmed its forecast of a 13 percent rise in annual profit.

Humana said in a statement today that earnings will range from $4 to $4.25 a share, rather than the $5.35 to $5.55 given on Feb. 4. First-quarter earnings will be 44 cents to 46 cents a share, down from a forecast of 80 cents to 85 cents.

Humana this year miscalculated how many elderly with serious medical conditions would choose its Medicare drug plan, among the cheapest available. The mistake added $160 million to the company's Medicare drug costs in the first two months of this year, executives said today on a conference call.

Humana's lower premiums and co-payments for its enhanced Medicare drug plan this year attracted 188,000 new members on Jan. 1. Drugs for those newer members cost about $50 more a month than patients who joined the plan in prior years, when it was more expensive.

`One-Time Situation'

``As we examined the February results in our Medicare prescription drug business, we detected higher than expected claims,'' said Michael McCallister, Humana's chief executive officer, during the call. ``This is a one-time situation that will re-set Dec. 31. We will willingly give up prescription drug plan market share. Appropriate pricing trumps market share.''

Humana said its policies under Medicare Advantage, a government-subsidized health plan, and coverage sold to U.S. employers and the military aren't affected, according to the statement.

Investors overreacted to Humana's Medicare mistakes, said Doug Simpson, a Merrill Lynch analyst in New York, in a note to clients today. He upgraded his rating to buy with a $41 target price. ``It is fair to knock Humana for the pricing error on the Medicare offering, but the recent rout in the stock seems excessive to us,'' he said.

WellPoint two days ago lowered its forecast, triggering the worst decline in managed-care stocks in a decade.

Aetna, which reaffirmed its forecast yesterday, rose $1.90, or 4.5 percent, to $44.55 in New York Stock Exchange composite trading today.

Ratings Downgraded

WellPoint's ratings were downgraded yesterday by Stifel Nicolaus, Goldman Sachs, FTN Midwest Research, J.P. Morgan, Bear Stearns and Raymond James. Fitch Ratings changed its outlook for the company's debt to negative from stable. Standard & Poor's affirmed its stable rating of WellPoint's credit, saying it would reconsider if the insurer's profitability slips further.

If WellPoint's woes do point to a ``cyclical correction'' for health insurers, the companies may be faced with profit pressures for ``several years,'' said Matthew Borsch, a Goldman Sachs analyst, in a note to clients.

WellPoint set aside $175 million to boost reserves for unexpectedly high 2007 claims filed this year, the company said on March 10 on a conference call with analysts. The insurer said medical costs for Medicare Advantage plans exceeded expectations as more elderly beneficiaries caught the flu.

WellPoint said profit also has been hurt by weakness in the U.S. economy, which has prompted employers to offer workers less generous health-care coverage to save money.

`Tough Headwinds''

``We already knew we had some tough headwinds in '08, what with political fears, investment portfolio suspicions, flu and falling state program funding,'' said Bear Stearns analyst John Rex in a note to clients. ``WellPoint opened up what we consider to be the ultimate managed care earnings fear: rising medical costs.''

Aetna reiterated in a statement yesterday its 2008 earnings forecast of $4 a share and said medical membership would grow 800,000 to 850,000. The insurer also said it expects the percentage of premium revenue spent on medical care to be less than 80 percent, and said first-quarter earnings would be 92 cents a share. Aetna will hold a conference for investors March 14 in New York.

To contact the reporter on this story: Lisa Rapaport in New York at Lrapaport1@bloomberg.net.

Last Updated: March 12, 2008 21:59 EDT