Humana Inc. on Monday announced third quarter 2012 earnings of $2.62 per share that were slightly lower than its earnings for $2.67 for the same period last year. Nonetheless, the company's third quarter performance beat both the company's internal guidance and bettered by a sizable margin Wall Street analyst estimates of $2.05 for the quarter.
The company beat its internal estimates and Street expectations primarily on the reversal of its second quarter report, which showed higher than expected growth in medical costs. As a result, Humana raised 2012 EPS guidance to $7.25 to $7.35.
Along with its earnings report, the company also announced three transactions, as the second largest provider of Medicare Advantage plans continues its plan to build an integrated healthcare delivery system as part of its core strategy to compete in the government sponsored business sector.
The largest deal was the acquisition of Florida-based Metropolitan Health Networks Inc., for $11.25 per share cash and the assumption of Metropolitan's debt, a deal with a total value of $850 million. Metropolitan is a medical services organization (MSO) that provides coordinated care for Medicare Advantage and Medicaid beneficiaries primarily in Florida.
Humana also announced it had made a non-controlling investment in a second Florida-based MSO, MCCI Holdings, which provides managed care services for Medicare Advantage and Medicaid beneficiaries in Florida and Texas. It also announced the acquisition of HIE technology provider Certify Data Systems of San Jose, Calif. Terms of the MCCI and Certify deals were not disclosed.
"This quarter we take a large step in advancing our strategy of an integrated delivery system, while successfully addressing our second quarter challenges," said Bruce D. Broussard, Humana president, who will take over as company CEO Jan. 1 from long-time Humana chief executive Michael B. McCallister. "As we look forward to 2013 and further implementation of healthcare reform, we believe capabilities such as relationships, risk-sharing partners, integrated data processes and clinical analytics combined with our national platform will allow us to assist the government, employers and individuals in addressing healthcare costs and improved member experience."
According to the company, once the acquisition of Metropolitan is complete, Humana via its subsidiaries CAC-Medical Centers Florida and Concentra, which the company purchased last year for $790 million, will have investment in medical centers that have more than 2,300 physicians nationwide.
"We have added approximately 50 primary care physicians and clinicians as well as opened a dozen joint ventures centers over the past year," noted Jim Bloem, Humana CFO, in the earnings conference call. "This experience combined with today's announced transactions validates to us that now is the time significantly accelerate and expand this build out."
In addition to its growth through joint ventures and acquisitions, Humana also announced it would spend up to $75 million in the coming year to continue to build out its clinical capabilities in six markets.
Analysts, some of whom exhibited some impatience with a perceived lack of earnings accretion due the significant investments made over the past couple of year in building a delivery network, were nonetheless largely supportive of Humana's recent moves.
"We believe (Humana's) push into integrated and aligned clinical care management offers the potential for the development of a longer-term sustained cost advantage relative to most of its peers," wrote Leerink Swann analyst Jason Gurda in a note to investors. That said, Gurda also cautioned there may be some "pushback" from independent physician practices and/or other insurers that have existing contracts with the Humana partners.
The move toward becoming a combined insurer-provider company may not be an easy one, however.
"Strategy-wise, it is a big shift, going from just being an insurer to being a hybrid model," said Sarah James, an analyst with Wedbush Securities, in a Wall Street Journal report.
Humana's selection of Broussard to lead the company on this transition to a blended model makes sense given his management background. His prior experience includes a stint as CEO of US Oncology, one the pre-eminent providers of oncology care in the country.
"The strategic implication that is in front of us here today, is that we are completely convinced that integrated healthcare as far and as fast we can take it, is critical to the next chapter of what happens in the Medicare business (and) potentially for the entire business," said McCallister. "The future is about integrated health, population health and payment for quality. Humana has set itself up today, in the midterm and the longterm, to be able to deal with all of that."