Humana appears focused primarily on organic growth, it remains open to partnerships and acquisitions, too

Business Strategy and Outlook

In the U.S. healthcare system, Humana pays caregivers to provide services through an integrated and value-based approach while also making the insurance experience easy to navigate for end users. Perhaps not surprisingly, given its founding as a nursing home in the 1960s, the firm has a special focus on serving the elderly population, especially in its top-tier position in administering Medicare Advantage plans. Given U.S. demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in U.S. health insurance.

Within Medicare Advantage, insurers like Humana are paid the same amount that the traditional Medicare program pays to provide benefits for its consumers; then the insurer aims to lower the costs associated with caring for users by making them healthier while also providing them additional benefits and generating a profit. Given that dynamic, incentive alignment with care providers remains more important in this product than in other health insurance products and Humana sees this alignment as its key differentiator from other health insurance players. For example, about two thirds of its Medicare Advantage members have primary-care physicians that operate in value-based arrangements, which encourage those caregivers to improve quality and costs. Humana owns some of these caregivers, including primary-care practices and the planned acquisition of the largest home healthcare provider in the United States, Kindred at Home. Also, the firm provides pharmacy benefit management functions, managing that key health input in an integrated fashion primarily for internal members. While especially powerful in the Medicare Advantage market, this integrated approach benefits Humana in its other target markets too, including Medicaid, military, and small-employer plans. With large opportunities in its target markets, management aims to continue growing at a fast pace with a long-term annual earnings per share growth goal of 11%-15%. While Humana appears focused primarily on organic growth, it remains open to partnerships and acquisitions, too.

Financial Strength

Humana maintains a healthy balance sheet. Most of its cash ($3.4 billion at the end of 2021) is held at its subsidiaries, though, and the company aims to hold about $500 million of cash at the parent company typically ($0.9 billion at the end of 2021), which constrains its liquidity a bit. Humana owed $12.5 billion in debt, or 44% debt/capital by the calculations at the end of 2021, which is above management’s typical leverage after the Kindred at Home transaction in 2021. With the divestiture of some non core businesses from that transaction expected in 2022, the leverage to start falling toward the company’s target of 35% in 2022, although share repurchases may constrain that transition a bit. With limited capital expenditure requirements, free cash flows to typically range between about $4 billion-$5 billion annually through 2026. Those cash flows should help the company meet its maturity schedule during the next five years, which cumulatively totals $7.2 billion, and also deleverage after the Kindred at Home transaction.

Bulls Say’s

With its prowess in Medicare Advantage plans, Humana looks likely to benefit from strong demographic trends and increasing popularity of that program.

Humana enjoys industry-leading customer satisfaction metrics that positively influence its brand and reputation in the consumer-driven Medicare Advantage and Medicaid insurance sectors.
Humana’s growth trajectory looks strong, with management aiming for 11%-15% EPS growth in the long run.

Company Profile

Humana is one of the largest private health insurers in the U.S. with a focus on administering Medicare Advantage plans. The firm has built a niche specializing in government-sponsored programs, with nearly all its medical membership stemming from individual and group Medicare Advantage, Medicaid, and the military’s Tricare program. The firm is also a leader in stand-alone prescription drug plans for seniors enrolled in traditional fee-for-service Medicare. Humana offers employer-based plans primarily for small businesses along with specialty insurance offerings such as dental, vision, and life. Beyond medical insurance, the company provides other healthcare services, including primary-care services, at-home services, and pharmacy benefit management.

(Source: MorningStar)

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