Earnings Improve for Health Care Providers Humana and HealthSouth

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Health care providers Humana Inc. (NYSE: HUM) and HealthSouth Corp. (NYSE: HLS) both posted earnings today that topped Wall Street expectations.

Rising costs for medical services is keeping people away from doctors. Worries about the high costs of service means that even those with insurance are staying away. Such behavior does wonders for a managed-care provider’s earnings, and that’s what we’ve seen this morning from Humana Inc.

An alternate scenario was played out by HealthSouth Corp., which has focused its business solely on inpatient rehabilitation services. HealthSouth posted second-quarter earnings this morning that beat expectations by a penny, excluding items, and missed revenue estimates by about $9 million.

Net profits at Humana leaped 21%, posting EPS of $2, above expectations of $1.67. Revenue of $8.65 billion was also above expectations of $8.1 billion. In the second quarter of 2009, Humana posted EPS of $1.67 on revenue of $7.9 billion. Enrollment in the company’s Medicare Advantage health plans rose 17% year-over-year, and 1% sequentially.

Such growth boosts revenue in the quarter when the enrollments are begun, but threatens profits in the future because Medicare Advantage customers file higher claims as a percentage of premiums than do other customers. Humana paid out 85.3% of government operations segment premiums in claims during the second quarter. That’s up from 84.1% a year ago and compares with a company-wide payout of 83.3%.

Humana also benefited from lower claims cost in its commercial segment, where payout on claims amounted to 75.6% of premiums paid in, down from 80.6% in the year-ago period. The company noted that the lower payments were “due to lower levels of health care services utilization year-over-year and continued pricing discipline.” In other words, people don’t go to the doctor, but they continue to pay high premiums.

Humana raised its full-year EPS guidance to $5.65-$5.75, up $0.10 on each end of its previous range. That’s pretty much in-line with the EPS of $5.71 that analysts were expecting. Third quarter EPS guidance rose to $1.65-$1.75, where analysts were expecting $1.41. Government segment payouts are expected to be slightly lower for the second half of the year, while commercial segment payouts are expected to be somewhat higher.

HealthSouth also raised its full-year EPS guidance from $1.60-$1.70 to $1.66-$1.74. The company is also expanding, having purchased two new hospitals in the second quarter and started planning for construction of a new hospital in the fourth quarter. The company still has $1.63 billion in long-term debt, though it increased its cash and equivalents by $91.6 million in the quarter, giving HealthSouth $172.6 million in cash.

HealthSouth began focusing on inpatient rehabilitation services in 2007, and has slowly been growing its balance sheet. While the numbers aren’t as large as Humana’s, as baby boomers age HealthSouth’s services will be in greater demand.  If well-managed, the company should continue to grow organically for some time to come.

Humana shares are up about 2.5% this morning, while HealthSouth shares are up around 1%.

As of this writing, Paul Ausick did not own a position in any of the stocks named here.

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Article printed from InvestorPlace Media, https://investorplace.com/2010/08/earnings-improve-health-care-providers-humana-healthsouth/.

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