Opinion: Is Healthcare Confusing Valuation and Stock Price With Long-Term Value?

Is it time to put healthcare's frenzied dynamics in perspective—Medicare Advantage specifically—so that an industry charged with generating better, more affordable outcomes does not confuse Wall Street's frequently fickle ticker with long-term value?

About a month ago, Humana's stock price dropped more than 18% following the company's significantly reduced Medicare Advantage (MA) enrollment growth projections. Financial news outlets reported hourly on Humana and its competitors. Over that same period and in contrast, big tech was abuzz with healthcare's growing strength in the digital consumer space at CES 2022—an annual conference at which Humana (in past years) has been the only health insurer to present and is still the CES organization's only health plan member.

But Humana and CES introduce a broader question beyond their recent headlines. Is it time to put healthcare's frenzied dynamics in perspective—Medicare Advantage specifically—so that an industry charged with generating better, more affordable outcomes does not confuse Wall Street's frequently fickle ticker with long-term value?

The stock price story and Wall Street competitor impact

Humana is the second-largest insurer of MA plans, which generate the bulk of its enrollment. So when the company cut its 2022 growth projections nearly in half, it mattered. And while it is true that Humana's market dip was the most precipitous—and that its stock price is still well below its former value—most of its competitors are still rebounding as well.

But rebounding from what? Most other MA plan projections had remained strong and early 2022 Annual Enrollment Period (AEP) numbers showed gains from the same plans whose stocks had dropped alongside Humana's. How does one plan bring its competitors down when they are growing against the same headwinds in an MA market whose overall annual enrollment grew nearly 9%. It's a complex picture and over the past couple of years, every piece of it has shifted—at times in opposing directions.

Complex market dynamics

It starts with all of that MA growth to be had. Within these lush green fields, competition and shifting market share are a consistent story. Medicare is, in the words of Anthem CEO Gail Boudreaux, a very consistent competitive environment.

Competitive factors include market and plan expansion to meet Medicare age-in volumes as well as a dicey subject during this AEP: pricing. Discussing results, Humana and Cigna cited competitor low-balling, with Humana CEO Bruce Broussard adding aggressive marketing and sales tactics. Broussard noted to analysts that the market "was becoming commoditized … [and] we're not going to play that game."

Analysts disagreed while affirming Humana's emphasis on the importance of value delivery and the long view, and with Fitch Ratings Senior Director Brad Ellis adding that "pricing discipline" is a bigger concern than enrollment projections.

Disruption fever?

The pricing and commoditization chatter are linked to some degree to another MA dynamic: the threat startup insurers pose to incumbents. And while these new entrants have taken some market share from established players, those incumbents also regularly steal market share from another. This AEP, MA disrupters lost enrollment to their larger competitors as well with some also falling short of their projections.

About these dynamics, UnitedHealthcare's CEO of Medicare and retirement Tim Noel also noted: "The trend of more entrants, [and] better benefits has really been a multi-year one … And we see this trend as being one that's very good for seniors and also one that's very good for the overall growth of the Medicare Advantage industry."

These perspectives are what healthcare needs: long views that balance all the "red-hot" things coming out of the aforementioned CES conference and the massive amounts of venture capital (VC) that is funding them.

Red-hot can quickly cool. Countless healthtech stocks have dropped significantly following massive valuations and IPOs. It's worth asking if there might be a touch of irrational exuberance in both the public and private MA markets.

Value versus valuation

There are concerns that MA startup valuations are too inflated. And as for the flush MA market in general, a caveat has begun to creep. MA enrollment is expected to surpass traditional Medicare by 2030, but most of that growth will be captured by 2025—around the same time that Medicare's hospital trust fund is projected to be insolvent and U.S. healthcare spending is expected to surpass 20% of GDP.

Hence, the MA urgency and a return to the question: as competition increases and more publicly traded healthcare companies expand their VC arms, are the distinctions between valuation and actual value starting to blur—if not operationally than psychologically? Projections of "double-double" growth are not uncommon, even among healthcare payers. But how advisable is this from an industry charged with saving lives and when health equity lags so desperately?

Market forces

To ask these questions is to question the free market itself. Lest that seem naïve, one of the founders of the Lean Startup method has done just that. Eric Ries launched the Long-Term Stock Exchange (LTSE) in September 2020 with a powerful statement: "Modern companies measure progress over decades, not financial quarters." In June 2021, growth companies Asana and Twilio joined the LTSE, which requires strategic transparency and value-based executive compensation tied to outcomes.

It usually takes a major market correction for changes like these to happen (e.g., 2008) and we are in one: the pandemic. Health plans have had to adapt rapidly, finance COVID-19-related care unexpectedly, and weather revenue losses patiently. They've largely managed to do it. But the pandemic isn't over, and neither is its impact on the healthcare industry or the stock market at large.

Healthcare's mindfulness moment

In 1971, the dollar's gold standard fell to the underlying barometer that's been present all along: the hopes-and-fears standard, otherwise known as market forces. This system gives greater flexibility but is based on escalating risk and reward. This description resembles the value-based design approach that healthcare is attempting to reform reimbursement, improve care, and deliver value.

So where does that leave things? If we come full circle, Humana's stock is now steadily rebounding after a positive fourth-quarter earnings call. Expect also for the company to return to a future CES conference, joined by its competitors. In the meantime, wait and see. And while that isn't something the stock market likes to do, perhaps just like the myriad digital meditation apps healthcare is investing in, the industry could use a mindfulness moment.