“It’s risky to be this upside down.”
Michael McCallister, CEO, Humana
(Aug. 3, 2009 conference call with Wall Street analysts)
We all know that Humana is heavily reliant on government business – especially Medicare Advantage and Part D. Shares in the company are discounted to reflect the risk of future Medicare Advantage cuts.
But today was a good day for Humana. Shares were up 5% in midday trading after the company announced that second-quarter profits topped Wall Street expectations and that full-year 2009 earnings were on track.
Medical cost ratio in the company’s government business fell 220 basis points to 84.1%, driven largely by improvement in the stand-alone Medicare prescription drug plan business. What’s more, McCallister said all the right things about Humana’s ability to reduce costs and weather the Medicare storms going forward.
Unfortunately, like other leading plans, Humana’s commercial business took a hit in the second quarter. Commercial lives fell 3% to 3.4 million versus a year earlier. Fully funded group lives alone fell nearly 8% to 1.5 million. Commercial utilization rose, especially in the company’s small group segment, driving medical cost trends to 7% from a prior range of 6% to 7%.
While Mike and company remain hard-pressed to grow commercial, there is one bright spot: individual membership rose 17% to 347,000 in the second quarter.
A little history: Humana signed its first individual member in 2002, so its growth in the market has been rapid. It now offers individual plans in 26 states (the largest being Colorado, Florida, Georgia, Illinois and Texas), with a 27th state planned for 2010.
Individual is a tricky business where experience is critical to success. It’s also a market poised for growth given proposed healthcare reforms. I like Humana’s chances to win in this market. That said, it remains unclear how much individual will move the needle toward diversification.
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