Health care companies reported mixed vital signs on Monday. Two big managed care players, Humana ( HUM) and Coventry ( CVH), took a healthy bounce after beating second-quarter profit expectations and issuing upbeat forward guidance. But HCA ( HCA) slipped after failing to meet even recently lowered expectations as the company continues to struggle in a particularly tough hospital environment. WellPoint ( WLP) and Anthem ( ATH) also fell due to complications that are now threatening a merger of the two giant health insurers. Humana began the day as the strongest performer of the bunch, jumping 5% to $17.90 at the open after posting second-quarter operating profits of 46 cents a share that beat the consensus estimate by 4 cents. The company also predicted that full-year profits would surpass the current estimate of $1.61 a share and come in at between $1.63 and $1.67 instead. "The benefit of Humana's diversification among multiple lines of business is evidenced in this quarter's record results," stated Humana CEO Michael McCallister. "The continued success we are experiencing with our traditional commercial and government products, combined with favorable results from and growing acceptance of our cutting-edge consumer strategy, are leading to record earnings for 2004." Humana's second-quarter revenue, totaling $3.43 billion, also topped the consensus estimate of $3.36 billion. But the company is now forecasting full-year revenue of $13 billion; that's $110 million shy of current expectations. Goldman Sachs analyst Matthew Borsch spotted other signs of weakness. Specifically, he pointed to Humana's commercial insurance segment -- where both pricing and enrollment are vulnerable -- as an ongoing area of concern. "Humana
has strongly emphasized it is maintaining price discipline, which is leading to attrition within its commercial risk book," Borsch acknowledged. But "while we like strong pricing discipline, we also believe some pricing concessions are unavoidable in this environment."
Borsch has been warning for months that intense competition could threaten managed care pricing and end the sector's long bull run. But Monday brought news of another healthy checkup in the sector as well. Coventry reported a 33% jump in second-quarter earnings and beat the consensus estimate by 6 cents with profits of 93 cents a share. The company also told Wall Street, which was looking for full-year profits of $3.56, to expect between $3.60 and $3.65 instead. "I am pleased to report not only record earnings but the 24th consecutive quarter of profitable growth for our shareholders," announced Coventry CEO Allen Wise. "Our ability to grow both top and bottom line over an extended period of time demonstrates the value we provide our customers and proof that our model works." Coventry's stock jumped 4% to $51.64 after Monday's report. Still, Coventry actually fell short of revenue expectations. The company posted second-quarter revenue of $1.31 billion instead of the $1.32 billion Wall Street had projected. Meanwhile, HCA disappointed investors with both its top and bottom line. The giant hospital operated posted second-quarter revenue of $5.87 billion that was about $40 million shy of expectations. It also reported second-quarter operating profits of 65 cents a share that, while in line with its recently lowered guidance, still missed the consensus estimate by a penny. HCA did manage to post a 6.8% jump in same-facility revenue despite weak admission growth. The company also reported a recent decline in bad-debt expense, although it warned that industry challenges remain. "The sequential improvement in bad-debt expense, while positive, represents just one data point of improvement in the bad-debt equation, and many macroeconomic issues remain for the health care industry," HCA CEO Jack Bovender stated. "However, we have identified many improvements in our internal processes that we feel can help mitigate these costs."
In the meantime, HCA continues to provide a significant amount of uncompensated care to patients without adequate health insurance coverage. Bad-debt expense totaled $661 million, or 11.3% of revenue, in the latest quarter. Charity care for the poor came in at $232 million. Total compensated care, which includes both categories, was 14% higher than it was just one year ago. HCA's stock tumbled 2% to $39.95 on the company's latest quarterly update. Shares of WellPoint and Anthem were under pressure as well. On Friday, the California Department of Insurance denied a request that would allow the two for-profit Blue Cross/Blue Shield giants to unite. The roadblock came after the companies had already secured necessary approvals from every other state regulator providing input on the merger. Borsch, whose firm is advising Anthem on the merger, warned of possible trouble ahead. "We see a lengthy legal process ahead with uncertain odds," he stated. But "if the courts are unwilling to overturn
the decision and some other route to merger closing cannot be found, the silver lining here is that both Anthem and WellPoint remain fundamentally well-positioned on their own." Borsch acknowledged that an insurance commissioner in Kansas had successfully blocked a past acquisition by Anthem. But he also pointed to "major differences" this time around. Namely, he said, Anthem is now negotiating with a for-profit company instead of a non-profit Blue. In addition, he said, the company has scored overwhelming approval from a number of state regulators who have blessed the merger already. Still, investors remained jittery. Shares of Anthem slid 2.9% to $86.26 late Monday morning. WellPoint fell an even harder 6% to $103.20.