- Humana gets 90% of its revenue from federal and state health programs
- Humana’s Generates Huge Profits Serving the Riskiest and Poorest Populations (Seniors and Medicaid)
- The company raised its full-year 2022 and full-year 2025 expectations, indicating a CAG of 14%
Health insurance and welfare provider Humana (NYSE: HUM) the stock outperformed the benchmarks, rising 4.6% for the year versus (-31%) for the Nasdaq (NYSEARCA: QQQ) and (-16%) for S&P 500 (NYSEARCA: SPY). healthcare is considered a recession proof company that stays increase in costs at an annual rate of 5.8%, accounting for nearly 20% of US GDP. Humana is an integrated health insurer and healthcare provider such as UnitedHealth Group (NYSE:UNH), Cigna (NYSE: CI)and Aetna (NYSE: CVS). It benefits from the secular trend of a growing older population choosing to participate in Medicare Advantage HMO plans. For elderly patients, this makes solid economic sense. Patients with traditional Medicare coverage are responsible for paying the remaining 20% of a medical bill after Medicare pays the 80% portion on their reimbursement schedule. This can be nerve-wracking and expensive, especially on a steady income. However, a Medicare Advantage plan literally covers everything, leaving the patient only responsible for a $10 to $40 co-payment. Humana gets more than 90% of its revenue from Medicare and Medicaid programs. Ironically, these are the two most at-risk populations for coverage under a fee-for-service model. However, Humana is proving that it is highly lucrative under its value-based vertically integrated managed care model.
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The Evolution of HMOs
There was a time when health insurance companies were just payers and doctors were the medical providers. They were two separate parties. Doctors would treat patients and bill the health insurers for their services. Insurance companies would find creative ways to deny claim payments (referrals, authorizations, claims limitation periods, etc.) in an effort to maintain profitability. It used to be a cat and mouse game. In a nutshell, doctors would overcharge and insurers would underpay on a fee-for-service model. You were either a provider or a payer. Managed care, also known as health maintenance organizations (HMOs), disrupted the reimbursement model by introducing principal payments. These were fixed monthly payments regardless of visits to the doctors based on the number of patients who signed up with them as their GP in the network. Physicians would receive their monthly principal and collect a co-payment per visit. This helped HMOs become hugely profitable, while doctors often got a pay cut. Doctors’ offices would be flooded with appointments, causing patients to have much longer wait times to schedule or meet their doctors.
Vertically integrated healthcare
Ultimately, the insurers also became providers by building (or acquiring) their own medical care centers with their own doctors and specialists. Physicians worked on a paycheck and the HMOs were vertically integrated to provide all health care and collect all premiums and payments. The best example of this is Kaiser Permanente. The integrated care system offers a complete ecosystem for its members within every facility that includes labs, radiology, primary care physicians and specialists. Humana has also evolved into a vertically integrated healthcare and wellness company as it expands its primary care clinics under the CenterWell and Conviva Care Solutions brands. An important distinction is that Kaiser Permanente does not own any hospitals, and neither does Humana. It sold its hospitals in 1993 to HCA Healthcare (NYSE: HCA). Apparently hospitals don’t work well in a vertically integrated care model, just clinics, urgent care facilities and medical centers.
Revenue continues to grow
On January 27, 2022, Humana released its fiscal second quarter 2022 earnings report for the quarter ended June 2022. The company reported earnings per share (EPS) of $8.67 excluding one-time items, versus consensus analysts’ estimates for a profit. from $7.68 , a stroke of $0.99. Revenues grew 14.6% year-over-year to $23.66 billion, better than analysts’ estimates of $23.44 billion. Humana CEO Bruce Broussard commented, “We are delighted with our significant progress in growing the business, including our primary care clinics and our organic expansion of Medicaid membership, combined with the first rollout of our value-based home care. In addition, our strong earnings per share growth of 20 percent in 2022 and the investments our $1 billion initiative allowed us in our 2023 Medicare Advantage product offerings, our commitment to balancing our long-term membership goals term and profit growth.”
14% CAG rate until 2025
On September 15, 2022, Humana increased its full-year 2022 EPS from $24.75 to $24.75 from $21.85 by consensus analysts of $25.00. It also offered an adjusted medium-term EPS target of $37.00 for fiscal year 2025, representing a compound annual growth rate of 14% (CAG).
A simpler structure is aimed at seniors
From 2023, Humana will structure itself into two units under Insurance Services and CenterWell. Insurance Services will house the Retail and Group and Specialty segment for claims handling. CenterWell will house the Healthcare Services segment. CenterWell Senior Primary Care is the nation’s largest primary care provider targeting seniors and consists of 222 clinics serving 180,000 Medicare Advantage patients. It plans to open 250 clinics by the end of 2022 and another 30 to 50 clinics, with nearly half annually through acquisitions through 2025. It expects to earn $100 to $200 million in EBITDA by 2025 at 400 to 450 wholly owned centers or through JV. Humana expects its primary care operations to contribute $1 billion to EBITDA by 2032.
Attractive pullback levels
Using the gun cards on the weekly and daily time frames allows an accurate picture of the pricing playing field for HUM. The weekly gun chart peaked at around $514.71 Fibonacci (fib) level. The weekly gun chart breakout is stagnant as the 5-period moving average (MA) support begins to descend to $487.26, tightening the channel with its 15-period MA at $481.54. The weekly 50-period MA support is rising to $449.72. The weekly stochastic forms a mini inverse pup as it falls through the 80 band. the weekly market structure layer (MSL) on the break through the $444.57 level. The weekly upper Bollinger Bands (BBs) sit at $530.19 and lower BBs are rising near the $414.02 fib level. The rising trend of the daily gun chart is losing steam with a descending 5-period MA of $495.08 and an overlapping 15-period daily MA of $486.41 and a 50-period daily MA of $4878.72. The daily 200-period MA stands at $450.07. The daily stochastic has fallen through the 80 band, causing a potential oscillation and MA breakdown. The daily lower BBs sit at $459.41. Attractive pullback levels sit at the $475.84 fib, $449.82 fib/50-period weekly MA, $444.57 weekly MSL trigger, $422.89 fib, $384.14 fib and the $50-period fib level 355.88.
