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Morningstar | Humana's Strong Medicare Business Is a Key Asset Within the Health Insurance Market

Humana has done an outstanding job of navigating a tough operating environment, given a volatile health insurance market. We are impressed that the firm has robustly expanded its core MA and Medicaid businesses while preserving a decent level of profitability. However, we believe Humana's reliance on Medicare as a long-term growth driver and core strategy will be a headwind. Anticipating these headwinds, the firm has sought to expand its provider/retail store partnerships to gain more control over the care delivery for its membership book. We believe this strategy will help offset some of the increasing costs it will face over the next several years.Compounding some of the long-term issues has been an uncertain legislative landscape where there has been a recent repeal of the individual mandate and continual underfunding of insurer risk subsidies. With this as the backdrop, we would not be surprised if the firm sought to partner with another healthcare-related firm in order to gain scale and pricing advantages. Nevertheless, Humana was highly successful over the past 10 years in expanding its business as millions of Medicare recipients migrated to MA plans. However, much of the growth of MA products was due to outsize payment rates that were higher than those for original Medicare to motivate enrollment. This trend will reverse as the federal government tries to push MA payment rates down to those of original Medicare.We believe Humana is in the most challenged position of its peers on a stand-alone basis. It faces not only mandatory rate cuts but also potentially higher costs as the nation's older population increases its demand for healthcare without a corresponding increase in supply. Additionally, the implementation of exchanges and the stated strategic plans of other managed-care organizations will most likely increase competition in the MA market.