Humana Slashes Outlook Amid Higher Drug Costs

By DONNA KARDOS (Wall Street Journal)

Humana Inc. on Wednesday nearly halved its first-quarter earnings guidance and cut its full-year earnings projection on higher Medicare drug costs stemming from a cut in co-payment levels. The new guidance which sent shares of the managed-care provider plunging in premarket activity calls for first-quarter earnings of 44 cents to 46 cents a share, compared with the company's prior projection for 80 cents to 85 cents a share. Humana now expects 2008 earnings to come in between $4 and $4.25 a share, down from the prior forecast of $5.35 to $5.55. The company had given that full-year projection just a month ago when it raised a previous projection by five cents a share amid reporting a 57% rise in fourth-quarter net income.

The latest mean estimates of analysts polled by Thomson Financial were for per-share earnings of 84 cents in the first quarter and $5.50 in the full year. The news came a day after investors walloped managed-care stocks on a dramatic earnings warning by WellPoint Inc. Humana smashed through its 52-week low Tuesday as the stock closed down 24%. Shares fell to $39.02 in recent premarket trading Wednesday, levels last seen three years ago. While WellPoint's warnings was based on higher medical costs, Humana was hurt by drug costs. In a slide presentation accompanying a conference call by executives, Humana said it cut 2008 copays after overestimating the use of so-called Tier 3 drugs. That pushed member costs above the threshold called for by the Centers for Medicare and Medicaid Services and resulted in Humana lowering copays.

"In hindsight, we should have assumed that members would likely change their behavior and substitute lower tier drugs, rather than lowering our copays," Humana said in the presentation.

As a result, members' shares of drugs costs has become 26%, not the 33% target allowed. As a result, Humana is picking up an additional $160 million in drug costs. The lower copays also resulted in some higher-cost members transferring to Humana's enhanced plan, which saw member growth of 188,000 last year. The company much of growth was from previous members returning. The possibility of higher costs facing health insurers have added to other investor worries, leaving the group vulnerable. Wall Street also has grown worried about health plans' exposure to mortgage-backed securities in their investment portfolios. While the holdings apparently are largely investment grade and perform well, investor concerns are likely to linger until the broader credit markets stabilize, according to an analyst.