Wednesday, May 22, 2013

Humana CEO Sticks With Medicare Focus Amid Funding Pressure

Published May 21, 2013
Dow Jones Newswires

As the federal government squeezes payments for private Medicare plans, Humana Inc. (HUM), the big health insurer most tethered to the government health program, has no plans to shift gears.
Instead, the Louisville, Ky., company is pressing ahead with efforts to grow Medicare membership, while making its plans work more efficiently through methods such as providing more intense care upfront for sicker patients. Like other companies running Medicare Advantage plans, which cover more than 14 million Americans, Humana has to find ways to make a good business by doing more with less.
"Frankly if we're not doing that, we shouldn't be in business," Chief Executive Bruce Broussard said in a recent interview. "That's the responsibility we have."
He officially took over Jan. 1, long after predecessor and Chairman Michael McCallister greatly expanded Humana's Medicare footprint over a 13-year tenure. Much of that growth overlapped with a long stretch when Medicare Advantage plans were paid more than the equivalent, standard Medicare coverage. The private plans--which the government funds--often combine basic Medicare coverage for the elderly and disabled with extra perks, such as gym memberships.
The private market grew rapidly through these well-funded salad days, which stretched from about 2003 through 2009 and helped encourage alternatives to government-provided coverage. But under President Barack Obama's health-care overhaul law, Medicare Advantage payments are headed toward rough parity with payments within the traditional, fee-for-service Medicare program by 2017, analysts say.
Funding can vary for different plans, but the broad trend is unmistakable: A Humana investor presentation highlights declining Medicare Advantage funding every year since 2010. And while the health-insurance industry successfully lobbied away some cuts proposed next year, Humana and other companies like UnitedHealth Group Inc. (UNH) and Aetna Inc. (AET) have still warned they face tough reductions.
Those challenges are particularly acute for Humana, where about two-thirds of earnings are pegged to Medicare Advantage, Goldman Sachs analyst Matthew Borsch estimated. This high exposure has put some volatility in Humana's shares, which are up nearly 16% this year, but have lurched around amid worries about federal funding.
Analysts have mixed views as Humana weathers the storm. Mr. Borsch has a "sell" rating on the insurer amid concern about pressure on incoming government dollars in 2014 and 2015, though he expects strong growth in later years. Meantime, JPMorgan's Justin Lake raised Humana to an "overweight" rating shortly after the insurer posted strong first-quarter results and said it still expects to grow Medicare membership next year.
"The future of Medicare Advantage has become the biggest debate in the sector," Mr. Lake said in a research note earlier this month. This debate caused shares of both Humana and UnitedHealth, which also has a big Medicare business, to underperform large-cap peers, he said.
A key question is what kind of profit Humana can turn on those members going forward. Humana left that question hanging on its first-quarter call, when management backed away from a long-held goal of 5% Medicare pretax profit margins. Instead, the company set its sites on long-term earnings growth and return on invested capital.
According to Mr. Broussard, Humana's chronic-care program will help the company manage the latest funding reductions. This plan involves identifying and assessing members with chronic conditions like heart failure and diabetes early, because carefully managing these illnesses at home can help ward off expensive hospital trips later.
Several insurers are investing in programs like this as they chase an emerging market for so-called dual-eligible patients, those who qualify for both Medicare and Medicaid--the program for the poor--and who often have costly medical problems.
Meantime, Humana also continues to invest in deals with health providers, sometimes buying doctor practices outright. These deals give the company new leverage to encourage more cost-effective care. "You're buying part of your biggest expense," Stifel analyst Thomas Carroll said.
Health insurers also have warned that they may have to reduce benefits or raise member costs as they digest Medicare payment cuts. But the industry has "cried wolf before," said Joe Baker, president of the Medicare Rights Center, a nonprofit patient advocacy group.
"I think we do need to hold the companies' feet to the fire on their promise they can do this more efficiently," Mr. Baker said.
That is what Mr. Broussard expects. Meantime, the CEO, who first joined Humana in late 2011 from drug wholesaler McKesson Corp. (MCK), believes the skills Humana builds in the Medicare market-such as dealing with budget constraints and marketing insurance directly to people--will prove useful as Humana looks to bulk up in other markets, such as dual patients and individual policyholders.
"I really think that Medicare Advantage will be a large part" of the business going forward, Mr. Broussard said.
Write to Jon Kamp at

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