Humana Inc. (HUM) will have to raise Medicare Advantage premiums, cut benefits in those health plans or do both as a result of the government's move to cut reimbursement by 4% to 5% in 2010, although the managed-care concern expects its plans to remain appealing compared with industry rivals and traditional Medicare, Chief Executive Michael McCallister said Monday.

"Since our 2010 bids are due the first Monday in June, work is already underway to make strategic changes to...keep our plans competitive," McCallister told analysts on a conference call after the managed-care company posted first-quarter profit that more than doubled from a year earlier, and raised its full-year earnings guidance.

At the same time, Humana is working with U.S. senators from both parties who seek to have the Centers for Medicare & Medicaid Services revisit the unexpectedly low 2010 payment rates for the Medicare plans offered by private-sector health insurers.

McCallister later told Dow Jones Newswires he sees a "reasonably good" chance CMS will mitigate the cuts. The timing is difficult, though, as insurers must submit their 2010 Medicare Advantage plan designs in early June and Congress would have to override a planned 21% Medicare physician fee cut, as it is expected to do, before CMS would reconsider the rates, he said.

Meanwhile, McCallister said, Humana is conducting a market-by-market, product-by-product design review for 2010. for its Medicare Advantage plans, which generate more than half the company's revenue.

"We are cautiously optimistic that when we get done, our benefit plans are going to be very, very competitive," Chief Operating Officer Jim Murray said, adding that Humana also is cautiously optimistic it will see growth in Medicare Advantage plans next year.

Humana has the highest exposure to Medicare among the major, diversified managed-care plans and attributed better-than-expected first-quarter performance to the strength of its Medicare drug and health businesses. The company expects to add some 50,000 Medicare Advantage members this year.

In contrast, enrollment in Humana's commercial business declined, with layoff-driven attrition in small-group health plans far more severe than the company had expected. The company now expects commercial enrollment to decline by 150,000 to 175,000 this year, after previously forecasting little change from 2008. McCallister said a new government subsidy for Cobra coverage for those who have been laid off won't change industry dynamics, although it will help some people maintain health insurance.

While Humana's Medicare businesses boosted the bottom line, efforts in Washington to cut Medicare Advantage funding in 2010 and beyond create some uncertainty for the Louisville company, just as broader health-reform efforts in Washington cloud the outlook for the managed-care group.

Health insurers sell private Medicare Advantage plans that offer beneficiaries services not available through traditional Medicare. President Barack Obama and other Democrats have targeted the plans for payment cuts.

In addition to the 2010 cuts, the president proposed competitive bidding for Medicare Advantage in an effort to save more than $175 billion over 10 years. Obama complains the government spends 14% more on Medicare Advantage than it does on traditional Medicare coverage.

The industry takes a different view, defending Medicare Advantage as a program that lowers costs, improves health outcomes and appeals to seniors. Managements, including Humana's, say they will work with the administration.

"Original Medicare, which lacks any sort of cost controls and functions as a claims paying factory, is headed rapidly for insolvency," while Medicare Advantage offers care coordination, disease management and other activities that reduce costs, McCallister said.

In spite of efforts to target Medicare Advantage funding, McCallister remained upbeat about the business, saying Humana aims to keep the cost of care in its plans 15% below that of traditional Medicare and to build large networks.

"We've always liked Medicare. We've been in the business for more than 20 years," and plan to do well over the long term, he told Dow Jones Newswires, noting the millions of Americans aging into Medicare in coming years. "This is a real growth market."

As for broader health reform, McCallister said a government health-plan option for individuals would destroy the competitive landscape of the health insurance market. He compared the idea with traditional Medicare, which McCallister said inadequately compensates providers.

"It's just a slippery slope to a government-run system" and could derail reform efforts, he said.

Humana recently traded up $1.97, or 7.2%, to $29.33.

-By Dinah Wisenberg Brin, Dow Jones Newswires

215-656-8285; dinah.brin@dowjones.com