Medicare provider Humana slashed its first-quarter earnings forecast by nearly half on Wednesday amid high costs in its Medicare prescription-drug plans.
The news roiled the health-insurance industry, which many investors had seen as a safe bet during a downturn, for a second straight day.
Health insurer WellPoint on Tuesday cut its 2008 forecast, sending health-care stocks reeling.
Shares of Humana plummeted as much as 29 percent Wednesday, before pulling back to about a 15 percent drop, after tumbling more than 24 percent on Tuesday.
Humana shares had dropped as low as $33.69, their lowest point since May 2005. Humana shareholders have seen about $5 billion in market value wiped away in the past two days.
Hands Off Managed Care
"No one is going to give anyone the benefit of the doubt in managed care right now," said David Heupel, a portfolio manager at Thrivent Investment Management. "There are too many signs that things have deteriorated."
Health-insurer stocks -- which had fallen broadly on WellPoint's lower outlook -- were jolted again on Humana's announcement, but some analysts pointed out Humana's problems are company-specific.
"Humana's significant negative earnings revision is completely due to its Medicare drug plans and should not impact other products or other companies," Wachovia analyst Matt Perry said in a research note.
Until this year, Humana had been a stock-market star, with shares more than tripling from the end of 2003 to the end of last year. The company has capitalized on a federal expansion of Medicare, the U.S. government health program for the elderly.
Humana blamed its lower forecast on an error in designing benefits for one of its Medicare plans that cover only prescription drugs. It lowered co-payments too much, shifting costs to the company.
The Louisville, Ky., company now projects first-quarter earnings of 44 cents to 46 cents a share, down from its prior outlook of 80 cents to 85 cents a share. It slashed full-year earnings to a range of $4.00 to $4.25 a share from a previous forecast of $5.35 to $5.55 a share.
Problems Are 'Short Term and Correctable'
Chief Executive Officer Michael McCallister told analysts on a conference call that the problems were "short term and correctable" and projected that the company's growth trajectory would resume in 2009.
Humana said it based its revised projections for its prescription-drug-only Medicare plans on analysis of pharmacy claims through February.
It cut its projection for full-year operating profit margin for all of its Medicare plans to about 3 percent from 5 percent.
Goldman Sachs analyst Matthew Borsch said Humana should be able to limit the damage from this problem to 2008 given the annual nature of Medicare drug plan bidding.
Humana said its full-service Medicare Advantage plans were not affected by the revision in its outlook, nor were its commercial plans for employers and military services business.
Wachovia's Perry said Humana's prescription-drug only Medicare plans represent about 10 percent of Humana's earnings and 15 percent of revenue.
The shares could recover quickly, Perry said, as company executives speak at investor conferences in the coming weeks and with first-quarter results about a month away.
Humana shares cut their losses, trading down about 15 percent heading into the close.
Elsewhere in the sector, WellPoint , UnitedHealth Group , WellCare Health Plansand Coventry Health Care were lower, while Health Net rose.