Sometimes, the pain is not evenly spread. After Aetna’s market scare last week, when investors got spooked by the increase in the health insurer’s medical cost ratio, there was relief in Monday’s results from Humana. The focus here is on how well it can take advantage of opportunities in Medicare, following the programme’s expansion into drug coverage.
The signs are good. Enrolment figures, which looked punchy, are coming true, especially in the standalone drug plans. But the fancier Medicare Advantage offering, which provides more comprehensive health-care coverage and higher margins for Humana, is still on course to attract a high level of enrolment. And Humana has managed to hang on to its enrollees, with a retention rate of over 98 per cent. This matters because it will give Humana an important marketing advantage in future years.
This is the healthcare companies’ equivalent of the “land-grab”. And, as with all such sales pushes, investors have to wait to see if the hoped-for uplift in profits follows. In healthcare, this means that companies have to build up the administrative infrastructure to create the demand. The medical cost ratio, which measures the percentage of premiums paid out on medical expenses, can also get distorted as recent enrollees have not yet had time to reach the caps of their plans, after which they, rather than Humana, will have to bear more of the expenses.
In concrete terms, this means that Humana’s high first-quarter medical expense ratio of over 95 per cent for the Medicare drug plans should trend down to a full-year average of below 90 per cent.
These are exciting times for healthcare investors. But they have to be able to handle the uncertainty of back-end loaded results, combined with the extra scrutiny that always goes with having the government as a main customer.