LDN - Health and Fitness

Humana cuts outlook, raising new concerns about Aetna deal

[July 07, 2015] By Caroline Humer

NEW YORK (Reuters) - Humana Inc, fresh from announcing an agreement to be purchased by larger rival Aetna Inc, prompted new investor concerns about the $33 billion deal on Monday by lowering its 2015 financial forecasts.

The transaction announced on Friday is already expected to face a tough review by U.S. antitrust regulators, particularly if another major deal among health insurers emerges.

Humana, which has posted disappointing results for several quarters in a row, said on Monday that members of its Medicare Advantage plans for the elderly were using hospital services at a higher rate than the company expected.

That increase could cut into already tight profit margins, if Humana ends up paying more for medical claims than they anticipated when setting monthly insurance rates.

Humana CEO Bruce Broussard said on a conference call with investors that inpatient hospital admissions have not performed in line with what the company had forecast. That contributed to its decision to slash expected 2015 operating profits by more than 8 percent. The company said it had taken the higher Medicare Advantage hospital use into account when it priced premiums for 2016.

"If you take the 8 percent downgrade of their earnings and roll that through, that makes what Aetna paid pretty expensive," said Joel Emery, a portfolio manager at Tareo Capital Management in New York. The degree to which Humana will boost Aetna's earnings in 2017 and 2018 is less than what some investors had hoped for, he said.

Aetna's offer of $125 in cash and 0.8375 Aetna shares for each Humana share valued Humana at $230 per share. On Monday, Aetna fell 6 percent to $117, bringing down the offer price to $223 per share.

Reflecting growing doubts about the deal, Humana shares traded well below the proposed offer price, closing at $188.96.

"Aetna shareholders have to approve the deal, and with such a large premium, there is some outside chance that shareholders will not approve it," said Standard & Poor's equity analyst Jeffrey Loo.

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Humana's negative comments provided a silver lining to hospital operators, who stand to benefit if patient admissions rise and they are reimbursed for more of their services, said Les Funtledyer, portfolio manager at ESquared asset management. He owns shares of HCA Holdings and Universal Health Services.

Consolidation among health insurers is also spurring investors to seek out cheaper stocks in the healthcare sector, such as hospitals, said Jessica Bemer, portfolio manager for Snow Capital Management in Sewickley, Pennsylvania.

"If there are fewer insurers for healthcare investors to own, that means they have to get their healthcare exposure elsewhere," Bemer said.

Shares of Community Health Systems, Tenet Healthcare and HCA bucked the overall market's decline and gained 0.7 percent, 0.5 percent and 1.8 percent on Monday. Bemer holds Community Health shares.

(Additional reporting by Susan Kelly in Chicago; Editing by Christian Plumb)

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