Just as I predicted, Humana (NYSE: HUM) followed fellow health insurers UnitedHealth Group 's (NYSE: UNH) and Coventry Health Care 's (NYSE: CVH) in reporting higher revenue and lower profits, but that didn't seem to dissuade investors. In fact, Humana's results seemed to have spurred an upward trend in the entire industry yesterday. Unfortunately, this trend can't go on forever, since investors are running out of health insurers that haven't yet reported earnings.
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Humana's revenue was up 14%, thanks to a 19% increase in the membership of its Medicare Advantage program, as well as the addition of CompBenefits and KMG America -- which offer vision, dental, and life insurance -- at the end of last year.
But net income was down 3%, as higher-than-expected medical costs -- mostly from prescription drugs -- cut into the bottom line. Humana's stock jumped because the company had guided for an even bigger drop in the bottom line. It's much easier to substantially clear the bar when you take it off the posts and lay it on the ground.
Ironically, the company's Medicare drug plans -- yes, the same drug programs that started the entire industry's downward spiral -- contributed the most to the windfall. I guess Humana's miscalculations weren't quite as bad as they first appeared.
The good news for health insurers like Aetna (NYSE: AET) and WellPoint (NYSE: WLP) is that they're well off their 52-week lows, since investors have decided that the worst is behind them. The bad news is that it could be a long road back to the heyday of 2007. Patient, long-term investors should be able to buy in at these levels; just realize that the bottom-line growth won't return until the insurers can reset their premiums and pass along the higher costs to their customers.
Copyright © 2008 Universal Press Syndicate.
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