Humana's Managed Care Solutions Offers Opportunities For Investors

Jan.23.12 | About: Humana Inc. (HUM)

In the U.S., the only way to lower the unsustainable cost of the healthcare system is through increased participation of private corporations in the mostly still state-owned healthcare sector institutions. Hospitals, care homes, treatment centers, but also money made available for the general insurance plans like Medicare (mainly for the elderly and disabled) are increasingly managed by private, stock market listed corporations that allow shareholders and the state a high level of control and transparency in the way they operate and manage costs. With profit optimization, many efficiencies can be achieved, leading to much lower costs to the system. Scale enhancement and concentration of buying groups in the sector also helps margins. This trend is set to continue with the government increasingly shifting responsibility to the private sector while still taking care of the elderly and the weaker members of the society.

One company expected to profit from this trend is a company called Humana Inc. (NYSE:HUM). Humana is one of the largest managed care organizations in the United States. The company offers health insurance to around 8.4 million members in the government and commercial sectors.

The Latest Presentation gives you some insight and details about the company.

The focus of Humana is mainly on Medicare (34% of its members are reimbursed under the Medicare program, 61% of Humana revenue comes from Medicare). Within the industry, Humana also sells a lot of so-called 'Medicare Advantage Plans' with increased services covered at an extra fee.

But Humana also participates in Tricare and Medicaid. The commercial business of Humana offers medical and specialty products to employer groups and to individuals.

Investment Case
The main reason for investing in 'Managed Care' organizations like Humana is the aging population in the U.S. The large Baby Boom generation is now moving into the Medicare program. This program takes care of assured reimbursement for providers like Humana, hence there is a low risk for the company of not getting premiums paid and a high potential for profit optimization.

The company is quite acquisitive, as are others in the industry, with the latest purchase the Arcadian Group in the Southern U.S. states (Texas, Arizona, South Carolina). Acquisitions are usually earnings enhancing within a short period of time. In acquisitions, the focus is also very much on Health & Wellbeing with purchases of urgent care clinics, mental health institutions, etc.

Growth with care providers like Humana is mainly due to the addition of new members into the Medicare program offered by Humana, and through efficiency increases. This year, 158,000 new members should have been added, this excludes acquisitions. Besides retirees, the Managed Care companies can also attract private, retail clients to their 'Medicare Plans.' These participate with the elderly but pay a market fee.

For 2012 the company expects some 145,000-155,000 new members. This growth momentum can be kept up through 2013-2014, according to management. In July 2011 alone Humana added 5,000 patients. A large part of the projected members per the end of 2012 of 155,000 are retirees and come naturally to the company in the areas where Humana is active (75,000) so the rest of the growth projected, in the corporate and retail sector, should be easy to reach.

As a pure U.S. play with the structural changes in the HealthCare payment environment now driving efficiency providers' earnings like Humana's, the sector is of great interest to investors.

Membership growth is assured as more U.S. citizens become pensioners with each a right to Medicare treatments. Besides this, corporations and retail clients buy into these increasingly attractively priced Insurance policies that have huge cost benefits through their larger scale as they become big buyers of medications, hospital care, senior citizen care, etc.

Final Conclusion
The low valuation of the shares (P/E below 12 for 2012), high quality of balance sheet and management makes this stock an interesting play in the healthcare (insurance) business.

The investment in Humana has to be seen as a play on the growth of the number of retirees in the U.S. and the increased need for care. Through cost efficiencies the company is a profitable operator and keeps on acquiring both other care providers as well as insurers, again both private and public.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.