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Why Humana, Inc. Shares Delivered Healthy Gains

By Sean Williams – Feb 24, 2014 at 3:09PM

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Humana shares soar following the release of a favorable report from the Department of Health and Human Services. Should you buy this rally or stick to the sidelines?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Humana (HUM 1.33%) a health care company which provides a range of insurance products across the country, jumped as much as 12% after the U.S. Department of Health and Human Services released its 2015 proposal for Medicare Advantage funding on Friday and Humana released an SEC filing today.

So what: According to a proposal released by the HHS, Medicare Advantage rates are expected to fall by just 3.5% to 4% in 2015. Humana, which derives close to two-thirds of its business from Medicare Advantage, a supplemental insurance purchased by seniors to help defray costs not covered by Medicare, noted in today's regulatory filing that this decrease is significantly below the 6% to 7% decline that it had anticipated. Although insurers have 45 days to add their opinion on the HHS' release, I doubt Humana will be doing much in the way of disagreeing with its proposed cuts.

Now what: This is certainly great news for Humana which derives a majority of its revenue and profit from Medicare Advantage. We as investors know that the likelihood of ongoing Medicare cuts is high, so anything better than the worst case scenario presented by insurers is a good thing. However, at 13 times forward earnings, I'm a bit leery of Humana's potential, especially considering that its long-term reimbursement rates are likely headed lower.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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