HumanaHUM

Morningstar Rating

Stock Research and Analysis

by Matthew Coffina

Humana is highly leveraged to its largest customer--the federal government. Although the aging population and the likely expansion of public programs could provide Humana with future growth, we expect a Democrat-controlled Congress and the Obama administration to be unfriendly toward private Medicare plans in the coming years. Read more

Bulls Say

Unlike employer-based health insurance, membership in government insurance programs is expected to increase significantly in the coming decades.

Humana was one of the most aggressive early entrants in the Medicare Part D program. Prescription benefits could generate leads for new Medicare Advantage members.

Humana has participated in Medicare programs for more than 20 years. Its extensive claims database can assist in underwriting new policies, and experience may help the company navigate the complicated government bidding process.

Humana would have a leg up in dealing with new government programs that might emerge to reduce the number of uninsured Americans. Read more

Bears Say

Medicare Advantage plans piggyback off Medicare's broad provider network and discounted prices for health care. Although this saves Humana the costs of maintaining a network for its government business, it also commodifies its product.

The government instituted generous reimbursement terms to encourage seniors to switch to Medicare Advantage plans. If this incentive is removed, Humana may struggle to compete with original Medicare for members.

We think Humana will experience incomplete pass-through if reimbursements are lowered. If the government pays less, Humana can cut benefits and increase member cost-sharing, but will likely earn lower margins, too.

Humana's commercial business lacks the scale to compete with industry leaders like WellPoint WLP and UnitedHealth UNH. Read more

Strategy

Humana focuses on private versions of government-funded health insurance programs. Humana attempts to add value to these programs by guiding members through the health-care system, emphasizing wellness and preventive care, and directing members to lower-cost providers. Read more

Management

CEO Michael McCallister joined Humana in 1974 and assumed his current post in 2000. In 2005, Humana cofounder and chairman David Jones retired and was replaced by his son David Jones Jr. The younger Jones was trained as a lawyer and is managing director of a venture-capital firm. Read more

Profile

Humana provides health insurance and related services to employers, individuals, and beneficiaries of government programs. Of its 10.3 million medical members, about 67% are in government programs, including Medicare Advantage (the private managed-care alternative to original Medicare), Medicare prescription drug plans, Medicaid for low-income families, and TRICARE for military personnel. Read more

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