Mispriced plans in the Medicare Advantage and public exchange markets damaged Humana's business last year, and there's no certainty the insurer will turn things around this year.
Yet despite Humana's dented outlook and yearlong stock volatility, which has thrown Wall Street into a panic, the company still closed 2015 with a higher overall profit and revenue base. That's some consolation for Aetna, which agreed to acquire Humana last year for $37 billion and remains hopeful that state and federal regulators will OK the deal in the second half of this year.
Humana's fourth-quarter profit plummeted 30% to $101 million. Humana, following in the footsteps of UnitedHealth Group, in the fourth quarter posted a large premium deficiency reserve, which is accounting speak for an expected loss. The $176 million premium deficiency reserve, which was previewed in January, was attributed to the Affordable Care Act's exchanges for 2016. The sea of red ink has forced the Louisville, Ky.-based company “to evaluate its participation in the individual commercial business for 2017,” according to a news release.
Humana said its exchange members were much sicker than expected. Many enrollees who signed up for ACA plans in the first two years had pent-up demand and often needed expensive care. Insurers such as Humana, UnitedHealth and many co-ops did not price their plans to cover those huge medical claims.
If Humana and UnitedHealth abandon the ACA's exchanges, it will be a symbolic blow to President Barack Obama's healthcare law. Humana had 758,000 on- and off-exchange members as of Dec. 31, and UnitedHealth had 650,000. But some believe the companies are bluffing and are using their public positions to pressure the federal government to make changes to the ACA markets.
While Humana's ACA troubles have created further grist for political commentaries, the individual market represents a small portion of the company's business. Medicare is far more important to Humana—nearly 72% of Humana's entire revenue base comes from the taxpayer-funded program—and 2015 was a somewhat rough year.
Humana underpriced its Medicare Advantage plans based on assumptions that inpatient admissions among seniors would drop in 2015. That didn't materialize and led to higher-than-expected medical costs. Humana's medical-loss ratio for 2015 across all of its retail plans was 86.7% compared with 84.9% the year before, but executives expect “significant improvement” in the individual Medicare Advantage plans this year.
Other problems are hitting Humana's Medicare business now. As of Jan. 1, the Ohio Public Employees Retirement System moved away from Humana's group Medicare Advantage policies and shifted its retirees and spouses to a private insurance exchange. Humana called OPERS a “large profitable account” and said the change will dampen its profit and revenue. Only half of OPERS' members selected Humana for 2016.
However, Humana remains solidly in the black overall. ACA losses and dinged-up Medicare margins did not undermine Humana's still very profitable enterprise. The insurer's 2015 profit of $1.28 billion was an 11.2% jump from 2014. Revenue climbed 11.9% to $54.3 billion.