Reforms And Rising Costs Will Erode Medicare Margins

Key Takeaways

• Heavy reliance on Medicare Advantage exposes Humana to regulatory changes, political reform risks, and competitive pressures, threatening future earnings stability and growth.
  
• Rising healthcare costs, increased utilization, and tech-driven competition could compress margins and undermine long-term profitability if operational efficiencies are not achieved.
  
• Strong membership and segment growth, operational efficiencies, and cost management are driving stable revenue, expanding margins, and supporting long-term earnings stability.

Catalysts

Provides medical and specialty insurance products in the United States.

• Mounting federal and state budget deficits are expected to drive regulatory change and potential cost-cutting in government-sponsored health programs, which could lead to compressed reimbursement rates and directly reduce Humana's revenue growth in Medicare Advantage over the coming years.
  
• Escalating political momentum for large-scale healthcare reform, including the possibility of a shift towards a single-payer or Medicare for All model, poses a significant existential threat to Humana's business model and would sharply curtail its future earnings power if such reforms were enacted.
  
• Humana's heavy reliance on the Medicare Advantage market, which produces more than eighty percent of the company's revenue, leaves it highly vulnerable to negative changes in government reimbursement policy or heightened competition, risking declining revenue stability and long-term earnings growth.
  
• Persistent upward pressure on healthcare costs and rising utilization-particularly in high-cost categories like specialty pharmacy and oncology-threatens to outpace premium growth, which could drive sustained net margin compression if Humana is unable to sufficiently control operating expenses.
  
• Accelerating entry of tech-enabled competitors and ongoing consolidation among healthcare providers are likely to erode Humana's competitive moat and bargaining power, resulting in rising costs and reduced operating leverage that would constrain both revenue growth and future profitability.

Humana Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Humana compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Humana's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.4% today to 1.9% in 3 years time.
• The bearish analysts expect earnings to reach $2.4 billion (and earnings per share of $20.03) by about July 2028, up from $1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.5x on those 2028 earnings, down from 16.0x today. This future PE is lower than the current PE for the US Healthcare industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Humana Future Earnings Per Share Growth

Risks

• Robust population and membership growth in key segments, including Medicare Advantage, CenterWell primary care, Medicaid, and specialty pharmacy, provides a strong foundation for future revenue expansion and mitigates the risk of long-term decline in the company's top line.
  
• Sustained operational progress and investments in clinical excellence, quality (Stars performance), and technology-driven efficiencies point to meaningful opportunities for improved net margins and earnings over time, as the company continues to unlock cost savings and margin expansion.
  
• Durable performance and positive trends in value-based care and primary care businesses, including successful integration of new clinics and consistent cohort maturation, support the company's ability to achieve higher lifetime value per member and expand profitability.
  
• Expansion and diversification in the Medicaid segment, evidenced by new state contract wins and increasing scale, provide stable, recurring revenue streams and offset potential downside in more volatile or one-time market exits, supporting the company's earnings stability.
  
• Ongoing implementation of cost management strategies, including increased use of AI and advanced analytics, are leading to lower general and administrative costs and increasing operating leverage, which are likely to drive sustainable improvements in earnings and operating margins in the long run.

Valuation

• The assumed bearish price target for Humana is $224.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Humana's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $402.23, and the most bearish reporting a price target of just $224.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $129.7 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $226.56, the bearish analyst price target of $224.0 is 1.1% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.