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Humana Raises View for FY16, Medicare Rating Downgraded

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Humana Inc. (HUM - Free Report) has recently raised its financial guidance for 2016 and updated its outlook for the third quarter.

Based on the preliminary results of the to-be-reported quarter, Humana expects diluted GAAP earnings per common share (EPS) for the full year to be roughly $8.80. Adjusted EPS are projected to be around $9.50. For the third quarter, the company anticipates EPS to be $3.07 on a GAAP basis and $3.15 on an adjusted basis.

Humana had previously revised the guidance on Jul 21 and reaffirmed the same during its second-quarter earnings release in August. The company had then guided adjusted EPS of at least $9.25.

The recent increase of 25 cents in the adjusted EPS for the full year was likely driven by strong performance at the Medicare Advantage, Healthcare Service and Individual Commercial segments. Both Medicare Advantage, which comprises the Group and Individual segments, and Healthcare Service have recorded better-than-expected performance this quarter. The company has even managed to turn around the Individual Commercial business from last quarter’s dismal performance.

However, Humana witnessed a downgrade in the Star quality ratings for the 2018 plan year, as published by the Centers for Medicare and Medicaid Services (“CMS”). The latest Star quality ratings show that Humana’s percentage of membership in 4-star or higher plans as of Jul 31, 2016 has declined to 37% from the year-ago level of 78%. The company is already making strategic operational efforts to lower the negative impact of these star quality ratings. Humana also has a plan to file for the reconsideration of certain ratings under proper administrative process.

Humana had objected and closed a comprehensive audit program by the CMS, which has resulted into the civil monetary penalty imposed on Dec 29, 2015. The penalty led to an automatic downgrade in the Beneficiary Access and Plan Performance (BAPP) Star measure. The rating downgrade was also due to higher threshold levels for certain individual Star measures that were calculated across the sector other than the weighted average membership of each plan.

Humana believes that the CMS audit has not taken into account its relentless efforts on improvising services. The company has been persistently investing in the integrated care delivery model, operational processes and procedures, clinical engagement, provider engagement, and consumer engagement. With the latest rating downgrade, Humana is now focused on the effective implementation of its operational and strategic initiatives, specially the Medicare initiatives, state-based contract strategy, and participation in the new health insurance exchanges. The company is determined to get a better rating experience in the next CMS audit. The company, however, assured that this rating action will not hurt its Medicare membership growth next year.



On the other hand, Aetna Inc. (AET - Free Report) , which was set to acquire Humana, has received high Medicare Star Quality Ratings for its Medicare Advantage Prescription Drug (MAPD) plans for 2017 from the CMS. This upgrade reflected Aetna’s increased member base in plans with a star rating of 4.0 or higher than 91%, representing a 4 percentage point increase from last year.

Zacks Rank & Key Picks

Humana presently carries a Zacks Rank #2 (Buy). A couple of other favorably placed stocks in the same space include WellCare Health Plans Inc. (WCG - Free Report) and UnitedHealth Group Inc (UNH - Free Report) . While Wellcare sports Zacks Rank #1 (Strong Buy), UnitedHealth holds Zacks Rank #2.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Wellcare has recorded a positive earnings surprise in each of the last four quarters. The Zacks Consensus Estimate for 2016 and 2017 has increased by 1 cent and 14 cents, respectively, over last 30 days.

UnitedHealth has also delivered a positive earnings surprise in the four trailing quarters. The Zacks Consensus Estimate for 2016 and 2017 has increased by 1 cent and 5 cents, respectively, over last 30 days.

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