Humana Scores With a Surprise Turnaround in Medicare Advantage

Humana charges seniors more for its Medicare Advantage plans--and yet still they come! This was the prime revelation of the insurance company's first-quarter earnings report: Despite raising its premiums by 4 to 11 percent and instituting premiums in areas of the country where Humana formerly had none, its Medicare Advantage enrollment increased to nearly 1.47 million members as of March 31, up 16 percent from a year ago and 2 percent since the end of 2008. Premium income from Medicare Advantage plans increased by a whopping 28 percent in the quarter.

While almost half of Humana's 200,000 new senior enrollees came through acquisitions, it's clear that Medicare beneficiaries still find Medicare Advantage plans attractive. In fact, Humana CEO Michael McAllister told analysts he anticipates that Humana will sign up 50,000 seniors this year.

Overall, Humana earned $205.7 million in the first three months of 2009, compared with a profit of $80.2 million in the year-earlier period. Revenues jumped 11 percent to $7.71 billion. The insurer projected full-year earnings of $6.10 to $6.20 per share, higher than its earlier forecast of $5.90 to $6.10 per share.

Unlike WellPoint and United, both of which reported big drops in commercial enrollment in the first quarter, Humana's nongovernmental membership fell only 4 percent during the period. But the insurer predicted that enrollment would decrease further, mainly because of an expected decline in small-employer business.

Humana's real story, however, is the turnaround in its governmental segment, which replaced a $3.2 million net loss for the first quarter of 2008 with pretax net income of $166 million for the first three months of this year. Aside from the increases in Medicare Advantage enrollment, premiums, and the percentage of members who pay premiums, Humana also reduced the claims it paid out in its Medicare drug plans, while raising premiums substantially. As a result, membership in its Part D plans dropped to 2.08 million from 3.15 million a year earlier, and Part D revenues decreased 32 percent. But Humana's bottom line benefited from the business strategy.

Humana's gamble that seniors would pay premiums to its Medicare Advantage plans where before they paid none and higher premiums in other areas also appears to have been a good call. Perhaps that was because its competitors' rates were even higher. According to Humana's presentation to analysts, one of its Medicare Advantage PPO plans in Des Moines, IA, will charge members an average of $121 for 2010, and its competitors in the state will charge about 50 percent more.

Perhaps, as my colleague David Hamilton suggested several months ago, Humana is simply trying to extract as much income as it can from these plans before CMS reduces its payments to them. CMS recently announced cuts of around 4.5 percent for 2010, and deeper cuts are expected later. But meanwhile, surf's up for Humana and other plans that do a lot of business with Medicare.