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Humana Profit Declines 21% on Insurers’ Medical Costs

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April 30 (Bloomberg) -- Humana Inc., the second-biggest provider of U.S.-backed Medicare insurance, said profit declined 21 percent, missing analyst estimates, as premiums failed to keep up with medical costs. The shares dropped the most in three years.

First-quarter net income dropped to $248 million, or $1.49 a share, the Louisville, Kentucky-based company said today in a statement. The result was 2 cents lower than the average estimate of 9 analysts compiled by Bloomberg. Revenue rose above estimates to $10.2 billion, from $9.2 billion a year earlier.

The slowdown in medical procedures that has boosted health plan earnings for two years may be ending, Aetna Inc. executives said last week, after they fell short on earnings estimates. Humana today said its costs rose on enrollment gains and changes resulting from the 2010 health-care law, which requires insurers to spend more from premiums on members’ medical care.

“Humana had the highest expectations” among insurers, said Carl McDonald, a Citigroup analyst in New York, in a note to clients. “Those kind of earnings are still achievable, but the case isn’t as clear-cut as we thought three months ago.”

The insurer said 2012 earnings will be $7.55 to $7.75 a share, after providing a full-year outlook of as much as $7.70 in February. Analysts had estimated $8.09.

‘Very Good Quarter’

“We think this was a very good quarter,” Chief Executive Officer Michael McCallister told analysts on a conference call. Humana’s first-quarter earnings beat the company’s previous forecast, he said. “We did beat our guidance and raised for the year, and we have faith in where we’re going in the future with our strategy.”

Humana declined 8.1 percent to $80.68 at 4:05 p.m. New York time, its biggest one-day drop since March 5, 2009. The shares have gained 6 percent in the past 12 months. UnitedHealth Group Inc., based in Minnetonka, Minnesota, is the leading Medicare insurer.

The company said it spent 85.4 percent of premiums on medical claims, up from 83.8 percent a year earlier. Much of the increase came from Medicare Advantage plans, privately administered versions of the government-backed insurance program for the elderly and disabled.

Cost increased as Humana’s Medicare Advantage rolls for individuals grew to 1.88 million people, an 18 percent increase from a year earlier. That included an expansion in parts of the country where premiums were lower, the company said. Those plans were also less profitable as Humana prepared to meet a health-law requirement that Medicare plans spend at least 85 percent of premiums on patient care by 2014.

“Humana may be digesting further health reform items, but investors may not be pleased with the start to the year,” said Thomas A. Carroll, a Stifel Nicolaus & Co. analyst in Baltimore, in an e-mail.

Earnings were also hurt by a $30 million increase in costs for some employer-sponsored Medicare Advantage plans. Humana said it expected that to be a one-time item.

To contact the reporter on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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