Humana Shares Decline Amid Concerns Over Profit Risks from Veteran Care Plans
Humana Inc. (NYSE:HUM) shares fell by 6.5% due to concerns over potential earnings risks associated with the company's primarily veteran-serving Humana Honor plans. A recent scenario analysis by Piper Sandler analysts, inspired by an article in the Wall Street Journal, highlighted earnings risks related to members under both the Department of Veterans Affairs (VA) and Medicare Advantage (MA).
The analysis studying Humana's 375,700 Humana Honor plan members suggested that despite these plans being designed to attract veterans, they could pose a significant earnings risk by 2025. This coincides with a period where new management has promised to reduce healthcare costs and eliminate waste.
Sector experts' scenario analysis forecasts that Humana Honor plans could contribute $5.16 to earnings per share (EPS) in 2024. The analysis assumes that 80% of Honor Plan members utilize both traditional Medicare benefits and additional aid. In contrast, it estimates that 20% of members are non-users who do not consume any benefits covered by Fee-For-Service Medicare. This analysis aligns with claims made in the WSJ article, indicating that Honor Plan members generate 77% of the monthly premium per member compared to non-Honor MA members.
The estimated medical loss ratio (MLR) for VA users is 85%, which is regarded as conservative based on the utilization data in the WSJ article. For non-users, the estimated MLR is determined to be 20%, based on an analysis of additional benefits in the top 10 Humana Honor plans. The analysis also accounts for a 10.5% operating expense of premiums and a 21% corporate tax rate.
Analyst Jessica Tassan commented: "We forecast that Humana Honor plans will contribute $5.16 to adjusted EPS in 2024. Our scenario analysis assumes that 80% of Honor Plan members are users, meaning they consume both traditional Medicare benefits and additional aids at some level. We assume that 20% of Honor Plan members are non-users, meaning they do not consume any benefits covered by FFS Medicare."
Investors are closely monitoring these developments, as the potential decline in earnings from these plans could impact Humana's financial performance in the coming year. The company's focus on veterans through the Humana Honor plans is under scrutiny as the market seeks clarity regarding the long-term sustainability of its earnings amid changing healthcare policies.