The Humana (
conference call (4/26/2010)
was one of the most informative in recent memory. The market's
early enthusiasm for the stock gave way well before the call
concluded. Reversals of accruals and outsized premium increases
accounted for much of the earnings. Commercial enrollment continued
to fall while Medicare Advantage ((
)) increased 19% to 1.74M members. The company's unbalanced book
continues to get worse, increasing its dependence on government
Humana profoundly stated that healthcare reform is now the law,
so they must adapt and become much more efficient. Only the large
and dominant insurers will survive; the other smaller players will
either merge or go out of business. The dominant players will vary
The company's perspective on the upcoming medical loss ratio (
) regulations differed from other insurers' public statements.
While others primarily focused on moving costs from admin to MLR,
Humana was more concerned in how finely pools would be cut in
calculating MLR. They believed they are close to the required 85%
in large groups and 80% in small groups, but have too much
administrative overhead and broker commissions in the individual
market to meet the 80% mark.
While Humana might be able to meet the benchmarks nationwide,
MLR varies by plan pool, state and even metropolitan area. If every
individual product is weighed by a fine geographical slice, Humana
While Medicare Advantage is in the process of almost completely
engulfing the company, they say that their plans must be at least
15% more cost effective than traditional Medicare to survive under
healthcare reform. This comes from the previous environment where
MA providers were given a 15% premium over traditional Medicare.
The path Humana sees to achieving this is disease management of
their most costly seniors.
Disease management could take both positive and negative paths.
Chronic seniors with long life expectancies would receive extensive
calls and home visits from Humana nurses to insure care regiments
are adhered to. This is the positive side the company
The negative side of disease management is moving their entire
MA population to managed care and making referrals cumbersome for
the more frail seniors with short life expectancies and high end of
life medical costs. This might be the private insurers' route to
pulling the plug on grandma.
Humana is accelerating its move into the individual market in
preparation for the opening of the insurance exchanges in 2014. In
another profound statement, the company sees an acceleration in
employers dropping health insurance when the exchanges open. It
will become much more efficient for employees to purchase coverage
on the exchanges because only the most efficient insurers will
survive the highly competitive exchange system.
Allowing employees of larger companies to participate on the
insurance exchanges is phased in during the years following 2014. I
agree with Humana's analysis of the shift from employer to
individual health insurance. I think it is truly a healthy trend as
long as insurance regulation remains strong.
The evaluation of Humana as a stock rests on whether you believe
they can deliver on the efficiencies their new business plan
requires. This quarter's success was built on onetime events and
beating Medicare at its own game by 15% is difficult for me to
"Democrats move to blunt Citizens United ruling"
reveals that the Schumer, Van Hollen, Castle's campaign finance
bill will prevent government contractors from spending money to
influence elections. This legislation could be as profound to
private health insurers as the healthcare bill recently signed by
President Obama. All of the major insurers are large government
contractors, so their influence on public policy could begin to
On the positive side, Humana has shown the wisdom to accept
healthcare reform and is trying to adapt. However, I do not believe
they will be successful. While they talk a good game, they more
than hinted during the call that they are still counting on state
insurance commissioners to prioritize insurer financial stability
over lower premiums. Translation - they have not really convinced
themselves that change is inevitable.
Author is long HUM puts.
Through the Looking Glass: Thursday in