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Humana Cuts View, Spreading Insurer Pain

Melissa Davis

OKLAHOMA CITY -- Humana (HUM Quote) joined WellPoint (WLP Quote) in slashing its guidance, sending health insurer stocks spiraling yet again.

Early Wednesday, Humana warned that its profits will fall well short of expectations due to high costs associated with its Medicare prescription drug coverage. The company rushed to assure investors that its traditional health care coverage -- including its core Medicare Advantage business -- had not caused the shortfall.

Specifically, Humana expects to earn just $4 to $4.25 per share this year, well below its previous forecast of $5.35 to $5.55. Meanwhile, the company cut its first-quarter outlook by almost half.

Humana's stock plummeted 27% to $36.46 on the news, extending huge losses suffered Tuesday after rival WellPoint cut its own forecast for the quarter. Shares of Humana are now down nearly 43% this week alone.

Several other health insurers -- including Coventry (CVH Quote), Health Net (HNT Quote) and UnitedHealth (UNH Quote) -- were tumbling again as well. All of the companies are now trading at or near their 52-week lows.

Humana, quite simply, underestimated the costs of drugs covered by its Medicare Part D plans for seniors. The company cited problems with its "enhanced" Part D plan, including "new member experience," in particular.

"The company's revised projections for its stand-alone PDP's financial performance are based upon analysis of pharmacy claims through February 2008," Humana said. Ultimately, "higher-than-anticipated claims volumes for the stand-alone PDPs year to date are reflective of a combination of factors."

Unlike Humana, WellPoint reported a spike in costs for its broad Medicare Advantage coverage.

"It is not our Part D business that we are having our concerns with," WellPoint emphasized during a conference call. "We are seeing the higher trends in the Medicare Advantage business."

Indeed, the company added, "the Medicare Advantage [medical cost ratio] has deteriorated quite significantly."

Actually, WellPoint reported escalating costs for its health care coverage overall. The company offered weak enrollment projections as well. Several analysts rushed to downgrade the stock as a result.

In fact, Matthew Borsch of Goldman Sachs cut his outlook for the entire group. Borsch, for one, assumed that WellPoint's problems could soon spread.

"WellPoint's downside surprise to earnings changes our view," Borsch explained on Tuesday. "We are not willing to dismiss WellPoint's problem as mostly or entirely company specific."

Moreover, he added, "a quick fix may be elusive" for the group.

Know What You Own: Some other publicly traded companies in the health insurance industry besides Humana and the above-mentioned stocks include Aetna (AET Quote), currently trading up 3.5% at $44.15, and Cigna (CI Quote), up 2.9% at $39.87 in recent trading.