Humana Earnings to Drop in 2011 - Analyst Blog

On the expectation of the rise in doctor visits and medical procedures, Humana Inc. (HUM) lowered its 2011 earnings forecast to $5.35-$5.55 per share, down from the 2010 expectation of $6.40-$6.50.

During the third-quarter, Humana increased its 2010 earnings outlook to $6.40 - $6.50 per share, from its previous guidance of $5.65 - $5.75, which reflected improved operating performance and the expectation of a Tricare contract extension from April 1, 2011 through March 31, 2012.

However, Humana does not expect to win the Tricare South Region contract in early 2012, which would surely impact the projected 2011 earnings. Besides for 2011, Humana predicts an increase in the Medicare membership and medical costs to incline towards higher levels in its Commercial segment.

Moreover, Humana targets a 5% pretax operating margin for its Medicare Advantage plans. Currently Medicare profit margins are moving above Humana's 5% target, driven by favorable trends. Humana now expects to reset its target and hence predicts a lower profit in 2011.

Nevertheless, Humana is positive for its Medicare Advantage program to grow over the longer-term due to the healthcare overhaul passed in March 2010, which includes about $455 billion in spending cuts for Medicare and other federal health programs over the next 10 years.

The company launched a Medicare Part D prescription drug plan (PDP) on October 1 with Wal-Mart Stores Inc. (WMT) to provide Medicare beneficiaries including seniors and the disabled to save more than $450 on average in 2011 on premiums, prescription medication co-payments and cost-shares than the drug plans in 2010. Humana is one of the largest Medicare providers for the elderly.

We believe that with the launch of Humana-Walmart PDP, the company will be able to provide an affordable prescription solution to desired individuals, by enhancing its membership in prescription coverage plans and boost its mail-order drug business.

Over the long term also, Humana will be in a favorable position as demographic and reform-related trends expand Medicare and the individual market.