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Pending merger costs, public exchanges limit Humana profit

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Humana Inc.'s net income dropped 27.8% to $311 million in the second quarter of 2016, as costs related to its pending merger with Aetna Inc. and losses stemming from its public health insurance exchange plans squeezed earnings.

The Louisville, Kentucky-based insurer, which is defending its $37 billion tie-up with Aetna that was challenged last month by the U.S. Justice Department, saw revenue rise 2.0% to $14.01 billion year over year in the three months ending June 30, thanks to premium increases across segments and membership growth in its individual Medicare business.

Results, however, were greatly offset by transaction and integration charges of $26 million during the quarter related to the Aetna merger. Merger-related costs totaled $61 million for the first half of 2016, according to the results announced Wednesday.

The insurer also increased reserves for anticipated losses in its individual commercial business, which includes public exchange plans, by $208 million in the quarter to $337 million.

Humana also said results were reduced by lower services revenue due to its divestiture of Concentra Inc. in June 2015 and the loss of premiums from a large group Medicare account that switched to a private exchange this year.

Humana reported premium revenue of $13.65 billion, up 3.3% from same quarter a year ago. Medical membership as of June 30 increased slightly at 0.4% year over year to 14.2 million.

Humana also said its second-quarter 2016 consolidated benefit ratio was 84.3% vs. 85.2% in the prior-year quarter.

“We are pleased that our year-to-date financial results are demonstrating consistently strong operational execution across our core businesses, though challenges in our individual commercial business remain,” Brian A. Kane, Humana's senior vice president and chief financial officer, said in the statement.

Last month, the Justice Department sued to block Humana's union with Aetna, first proposed July 2015, largely because it would reduce competition in the Medicare Advantage market along with other insurance markets, according to the lawsuit.

Humana and Aetna on Tuesday announced they would sell certain Medicare Advantage assets to Molina Healthcare Inc. for $117 million in an attempt to satisfy the Justice Department's concerns.

Humana also last month announced it will sell plans through public exchanges in 11 states in 2017, down from 15 states this year because of profit losses. Humana also said it will stop offering off-exchange individual coverage in nearly all markets. In total, Humana is slashing its presence for on- and off-exchange individual policies to cover no more than 156 counties, down from 1,351 counties this year.

For the six months ending June 30, Humana recorded net income of $565 million, down 34.4% from the same period last year. Revenue totaled $27.81 billion, up 0.9% year over year, and premium revenue was $27.09 billion, up 2.4% from the year-ago period. Humana reported a consolidated benefit ratio for the first half of the year of 84.6% vs. 84.1% in the year-ago period.