Humana Inc. Shares Tumble Amid Concerns

Shares of Humana Inc. (NYSE:HUM) dropped 6.5% following investor concerns about potential earnings exposure from its Humana Honor plans, which cater primarily to veterans. A recent analysis by Piper Sandler, inspired by a Wall Street Journal article, revealed earnings risks linked to members covered by both Veterans Affairs (VA) and Medicare Advantage (MA).

The analysis, focusing on 375.7K Humana Honor plan members, indicates that these plans, while targeted at veterans, may pose a significant earnings risk in 2025. This is particularly relevant given the new administration's commitment to reducing healthcare costs and eliminating waste.

Industry estimates suggest Humana Honor plans could contribute $5.16 to adjusted earnings per share (EPS) in 2024. It assumes that 80% of Honor Plan members use both traditional Medicare and supplemental benefits, whereas 20% are classified as non-utilizers, not consuming any benefits under Fee-For-Service Medicare. This aligns with findings in the WSJ article, which noted that Honor Plan members generate 77% of the premium per member per month compared to non-Honor MA members.

The medical loss ratio (MLR) estimate for VA utilizers stands at 85%, considered conservative based on WSJ data, while for non-utilizers, it's estimated at 20%, derived from an analysis of the top 10 Humana Honor plans. Operating expenses are accounted for at 10.5% of premiums, with a 21% corporate tax rate applied.

Analyst Jessica Tassan remarked, "We estimate Humana Honor plans will contribute $5.16 of adjusted EPS in 2024. Our analysis assumes 80.0% of Honor Plan members utilize some traditional Medicare and supplemental benefits, while 20.0% are 'non-utilizers.'"

Investors are keeping a close watch on these developments, as the potential for diminished earnings from these plans could affect Humana's financial performance in the coming year. The company's commitment to serving veterans through the Humana Honor plans faces scrutiny as the market questions the long-term sustainability of its earnings amid changing healthcare policies.

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