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‘Major shakeup’ in military contract

7/14/2009 © Health News Florida
In what analysts are calling a "major shakeup," the Defense Department is switching two of its regional Tricare  contractors -- including the one that manages health benefits for hundreds of thousands of Floridians on active duty, their dependents, and military retirees.

The decision means that Humana Inc. will lose an estimated $3.8 billion in annual revenue that had been flowing to its wholly owned subsidiary Humana Military Healthcare Services.  UnitedHealth will take over a contract that federal actuaries expect to grow in costs by 11 to 13 percent a year for the next five years, according to Oppenheimer & Co. analyst Carl McDonald.

The loss will hit Humana in March 2010, the same year that Medicare payments to private insurers are expected to be rolled back. Humana is Florida's largest Medicare managed-care company.

Under the existing contract, Humana Military serves as the managed-care administrator of TRICARE health benefits to approximately 2.9 million people in Florida and nine other states. A Humana spokesman said the company doesn't break down the membership by state, but Florida boasts a large number of military bases and retirees.

“Humana Military is disappointed with the decision by the Department of Defense and looks forward to obtaining further clarity via a debriefing on the bidding process,” Dave Baker, president and CEO of Humana Military, was quoted as saying in a press release. “Our company will evaluate its strategic options with respect to the government’s decision, including protesting the award, and will act expeditiously to best position Humana for continued success.” 

The defense department also decided to switch contracts in the northern states, from HealthNet to Aetna. That block of business is smaller, worth about $2.7 million in revenues, analysts said.

The Tricare loss inflicts a "notable hit" on Humana, said Scott Fidel of Deutsche Bank. The company's managers had been confident that they would get the contract renewed, he said, and it's taking place at the same time that Humana's core Medicare Advantage business will be absorbing a rollback in premiums. Fidel estimates the rollback in Medicare rates will be "material," in the range of 4 to 5 percent.

The double whammy should cut Humana's per-share earnings next year by about 7 percent, Fidel said in a note to investors. McDonald also forecast a 7-percent drop. 

Tricare's two largest enrollments are in "Prime," an HMO with an opt-out, and "Tricare for Life," a Medicare supplement for retirees. Tricare also offers a PPO, called "Extra," and a fee-for-service option called the "Standard" plan. 

Humana does mostly claims processing for active-duty military and retirees who use military hospitals and clinics, McDonald says, but the company assumes some risk for managing the costs of dependents.