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Humana’s Pretty Good Year Reflects a Surprising Side to the Health Crisis

One of the big surprises of 2020 is that it has been a pretty good year for health insurers. Humana (NYSE:HUM), for instance, is up 5.6% for the year, about double the S&P 500 index’s 2.75% gain. Shares closed on Sept. 23 at about $385. That’s a market capitalization of $51 billion, but HUM stock still looks a bargain with a price-earnings ratio under 15.

A Humana (HUM) office building
Source: Shutterstock.com

Analysts support the stock, with 10 on Tipranks saying buy and only 4 advising hold. The average price target of $448 would be a nice gain from present levels. The next earnings are due Nov. 4 and estimates of $2.84 a share look beatable.

Privatization Pushback

Analysts at Goldman Sachs (NYSE:GS) have an easy explanation for what’s happening.

Rising unemployment means fewer people are insured. The pandemic means fewer people are going in for elective procedures. Political concerns seem to have been put off until 2021. Goldman thinks Humana could be worth $510 per share.

But this looks like a setup. More uninsured means more political pressure for big changes. Elective procedures will come back, meaning costs are going to rise.

Humana, however, is looking for even bigger business. It has added Raquel Bono, former CEO of the Defense Health Agency, to its board of directors. The company sees care for both the military and veterans being privatized by the Trump Administration. These huge contracts could add billions to the Humana bottom line.

But the political pushback on this is going to be enormous. There’s no great groundswell among veterans for having their care privatized. Currently the Veterans Administration delivers care for a fraction of the cost of private insurance. The same is true for TriCare, the military’s healthcare program. Before any of these programs get up and running, Democrats may well be in charge and eager to roll those costs back.

Pricing Power

Humana began life as a health maintenance organization. It now offers standard insurance and handles government contracts as well. About 16.7 million people get their healthcare through Humana, and Investors Business Daily believes it now has the pricing power to take profits higher.

There are reasons to be optimistic.

In addition to its big contracts, Humana is also a player in the Medicare Advantage business. More than 24 million people now buy these policies, but market penetration is still just 36% . This means more growth is available. Humana’s share is 18%, second only to United Healthcare (NYSE:UNH) at 26%.

To grow that, Humana is launching new programs for older patients getting heart bypasses and shoulder replacements. This is in addition to existing programs covering new knees, new hips and spinal fusions. The programs offer better care and lower prices at a network of participating hospitals.

While Humana looks to lag United’s Optum in automation, it’s also playing catch-up through a new contract with salesforce.Com (NYSE:CRM). It also has a $100 million investment in Heal, a telehealth start-up, which, in May surprised observers by introducing a telemedicine offering.

Bottom Line on HUM Stock

I may be wrong, but I suspect investors are right to be cautious on health insurance names, including HUM stock.

Results for 2020 look great. But Humana is putting off costs, and political consequences, that could prove a burden next year. The idea that you can add millions to the ranks of the uninsured, avoid costs raised by the pandemic, and go whistling off to Profitland looks naïve to me.

What people want isn’t insurance but care. This is clear from the results of the Healthcare.Gov exchanges. Managed care plans do better there than standard insurance. Insurers are profiting by not delivering it. Do you really think voters are going to let that slide?

On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.

Article printed from InvestorPlace Media, https://investorplace.com/2020/09/hum-stock-pretty-good-year-reflects-a-surprising-side-to-the-health-crisis/.

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