April 28 (Bloomberg) -- Humana Inc., the second-biggest provider of government-funded medical benefits, reported a 13 percent increase in first-quarter profit on enrollment gains in U.S. Medicare health plans for the elderly.

The Louisville, Kentucky-based company raised its profit target for the year as it reported today in a statement that quarterly net income climbed to $80.2 million, or 47 cents a share. Profit beat analysts' estimates by 2 cents a share.

The performance was better than the company had indicated last month, when Humana cut its full-year earnings goals by almost half. The insurer said at the time it had underestimated how sick the customers signing up for one of its Medicare drug plans would be. While the company added members in profitable Medicare Advantage managed-care plans, Democrats in Congress are working to reduce government subsidies for the program.

``Humana dropped the ball on one of their drug plans, and everybody knows that this horrible day of reckoning for the Medicare Advantage program is getting closer,'' said Dave Shove, an analyst with BMO Capital Markets in New York, in a telephone interview.

Humana rose $1.50, or 3.3 percent, to $46.38 at 4 p.m. in New York Stock Exchange composite trading. After climbing 36 percent in 2007, the strongest performance in the six-member S&P 500 Managed Health Care Index, Humana is down 38 percent this year.

Forecast

The company increased its profit goal for the year today to $4.10 to $4.35 a share from the $4 to $4.25 it forecast last month after reporting the drug-plan errors. First-quarter earnings per share beat the average 45-cent estimate of 14 analysts surveyed by Bloomberg. Before last month, the consensus had been 83 cents.

Quarterly revenue increased 12 percent to $6.96 billion from a year earlier. Profit in the first quarter of 2007 was $71.2 million, or 42 cents a share.

Humana wouldn't have fared as well as it reported today without $68 million in share buybacks and a lower tax rate for the quarter, said Christine Arnold, an analyst with Morgan Stanley in New York. The gains in Medicare Advantage managed-care plans weren't impressive, she said in a note to clients.

``The window for Humana-share outperformance is closing,'' Arnold said. ``Anticipated earnings upside in 2009 is more than offset by the near-certainty of Medicare payment cuts beginning in 2010.''

Humana Chief Executive Officer Michael McCallister told analysts on a conference call that he believes Medicare Advantage will continue to be profitable.

`Noise This Summer'

``We will have some noise this summer'' as lawmakers debate Medicare cuts, McCallister said. ``But longer term, nothing's really changed. We'll be part of the Medicare Advantage equation'' because Humana keeps its members healthier than they would be in conventional Medicare.

Investors, wary of a weakened economy and missed profit forecasts, buffeted the health-insurance industry last week. Shares fell after UnitedHealth Group Inc.'s earnings report on April 22 and rebounded the next day even as WellPoint Inc. reported its quarterly profit declined 25 percent. For the week ended April 25, the six-member Standard & Poor's 500 Managed Health Care Index was down less than a percent.

Insurers began offering government-subsidized prescription drug plans in 2006. More than half of Medicare's 44 million beneficiaries receive drug benefits through standalone policies or as part of their Advantage coverage. Humana's drug plan membership of 3.15 million is behind only UnitedHealth's 5.48 million.

Bids Too High

Last year, Humana said it lost 445,000 low-income members from drug plans because the government said the company's bid was too high. While Humana signed up 122,000 higher-income members in the first quarter, the insurer lost $100 million because it underestimated their use of the plans.

Medicare Advantage provides medical coverage with extra benefits from insurers, including lower out-of-pocket costs, compared with conventional Medicare in which the government pays doctors and hospitals directly.

Humana relies more on Medicare Advantage than bigger rivals such as WellPoint and Aetna Inc. The government plans to pay private insurers $86 billion this year to provide benefits to 9.76 million Advantage members, including Humana's 1.27 million. Only Minnetonka, Minnesota-based UnitedHealth has more enrollees in the program, 1.46 million.

Advantage plans will account for 60 percent of Humana's 2008 earnings before interest, taxes, depreciation and amortization, according to Carl McDonald, an analyst with Oppenheimer & Co. in New York. Humana collected $3.2 billion in Advantage revenue in the first quarter.

Advantage Enrollment

Humana added 125,000 Advantage members in the first quarter and said it expects full-year growth of up to 250,000.

Medicare could save about $11.2 billion, or 13 percent, if it paid for benefits directly, according to official estimates. Democrats want to cut payments to insurers, using the savings to increase Medicare fees for doctors and extend health benefits to about 5 million low-income children.

Consumer groups and lawmakers have criticized Humana and other insurers, saying they misled some elderly people into signing up for plans that don't include their longtime doctors and hospitals or that have surprise co-payments.

In the past nine months, Humana has paid $1 million in fines to Oklahoma and Illinois for using unlicensed Medicare Advantage agents.

Medical Costs

Humana spent 86.7 percent of total premium revenue on medical care in the first quarter, down from 86.8 percent a year earlier. In the fourth quarter of 2007, Humana reported the ratio was 80.3 percent.

Analysts and investors view the cost percentage, known as the medical-loss ratio, as an indicator of future industry earnings. A rising percentage suggests the volume and cost of care ate into profits.

``Industrywide medical cost trends are not accelerating,'' said Matt Perry, an analyst with Wachovia Securities, in a note today to clients. ``Humana's problems are confined to mispricing the prescription drug plans, and we believe this is 100 percent fixable for 2009.''

To contact the reporter on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net.

Last Updated: April 28, 2008 16:18 EDT