Corporate Research Group’s Weblog

Humana chief executive Mike McCallister once told me if investors are concerned about exposure to government-related business they shouldn’t invest in his company.

Shares in Humana were down 8% as of 2:00 p.m. today after the company announced it had lost the contract to provide health benefits to 2.9 million Tricare South Region members.  Instead, the Dept. of Defense awarded the $21.8 billion contract to UnitedHealth.  The value is based on a 22-month initial award of $3.7 billion, plus four more one-year option periods.

Things were even worse for Health Net, which saw its shares plummet 14% as of 2:00 p.m. today after it lost the $16.7 billion Tricare North Region contract to Aetna.  The North Region contract has a 22-month initial award of $2.8 billion, plus four more one-year option periods.

Health Net was hit harder because the Tricare contract accounts for 25% to 30% of its profits, compared to a smaller percentage for Humana, according estimates from Wall Street analysts.  Still, it’s painful for Humana, which also has a lot of exposure to looming Medicare Advantage cuts.  I expect both Humana and Health Net will challenge the awards, but to no avail.

What’s interesting is while the business was important to Health Net and Humana, it appears to add very little to Aetna and UnitedHealth — raising the question of whether the winners simply bought the business.  The risk may be offset by the new contracts’ cost-plus features.

Notes Christine Arnold of Cowen: “The annualized, estimated net income gain for United and Aetna is less than half the estimated loss in earnings of Humana and Health Net, implying aggressive bidding by the victors relative to the incumbents. It is unclear if the risk sharing elements of the new contracts will leave the contract winners exposed to losses if costs come in over those assumed in the bids.”

Finally, the Triwest Healthcare Alliance Corp. consortium of Blue Cross Blue Shield plans retained the $17 billion Tricare West Region contract, which has a 22-month initial award of $2.9 billion, plus four more one-year option periods.

All of which suggests how brutally competitive it is out there in managed care land as plans stuggle to find ways to grow.

This entry was posted on Tuesday, July 14th, 2009 at 2:55 pm and is filed under Managed Care. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.