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Morningstar | Humana's Dominant Presence in Medicare Advantage Is Deserving of a Narrow Economic Moat

Humana's core competency as a plan sponsor in the Medicare Advantage program has supported consistent excess economic returns over the last decade. Following consolidation in the industry, completed funding cuts from the Centers for Medicare and Medicaid Services, and ongoing support for the expansion of the Medicare Advantage program, we think Humana has dug a narrow economic moat for itself within its competitive niche. Local scale within its relevant markets, an expanding provider presence, and regulatory expertise put the firm on superior competitive footing than many smaller players offering plans in the market. Humana was early in establishing its leadership position in Medicare Advantage, a program that now accounts for the bulk of membership growth across the managed care industry. We think this foresight will continue to benefit shareholders, especially as policy discussions around expanding the Medicare program continue to gain traction.We commend management for maintaining the company's moat while the firm's sale to Aetna was under regulatory review and continuing to forge ahead after the deal failed to gain approval. Its strategy has been defined by a multitude of partnerships and joint ventures in different areas to improve the firm's ability to manage the cost of care for its largely senior membership base. Wholly owned or partnered primary care clinics, an early partnership with Walgreens, and its minority stake in the leading home health and hospice business nationally have given management more flexible avenues to try and lower the cost of care in Medicare Advantage.The national dialogue around healthcare reform will likely intensify leading into the 2020 election cycle, but we contend Humana retains a unique position as a premier government contractor in both Medicare Advantage and in the military's TRICARE system. While we think the likelihood of widespread industry disruption is relatively low, Humana is in a position to potentially benefit from more marginal regulatory change. An expansion of Medicare eligibility is likely to benefit the Advantage program, and continued expansion of Medicaid is likely to be of interest to management.