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On Oct. 8, the Centers for Medicare and Medicare Services released Medicare Advantage star ratings, including composite figures and ratings for each plan. Humana rose 13% in after-hours trading while other MCO shares were much less volatile.

Why it matters: Humana's shares rose as a key plan received a rating of 4 stars for 2027, versus 3.5 stars in 2026. That change should improve marketing in 2027 and materially boost profits in 2028, after a couple of years of that key plan falling below the 4-star threshold. Plans rated 4-star or higher receive 5% higher benchmark rates versus 0% for 3.5-star or lower plans, which can make a significant difference in the profitability of Medicare Advantage plans that typically only target low- to mid-single-digit operating margins. With the important annual enrollment period scheduled to start on Oct. 15, 71% of MA members are currently enrolled in 4-star plans or above for 2027, up from 67% in 2026. So aside from Humana's big improvement, we expect relative stability across the industry, although key MA insurers will likely make announcements about this important measure shortly.

The bottom line: We are raising our fair value estimate for narrow-moat Humana to $502 per share from $350, pushing our assumptions closer to our previous bull case, which depended on significant margin improvement as Humana improves its Medicare Advantage fundamentals. We appreciate this step in the right direction from Humana and think it bodes well for future profit growth at this MA-concentrated firm. Specifically, we now assume Humana can reach at least $40 of earnings per share by 2030, up from closer to $30 in our previous model. However, we still see significant uncertainty around Humana's profit trajectory on both the upside—primarily if margins rise higher or faster than anticipated—and the downside, related to ongoing regulatory concerns.

BLANK PAGEFor more details on how Humana stacks up against its peers, along with the industry's growth prospects, moat ratings, moat sources, and regulatory concerns, please see our September 2026 Industry Landscape on managed care organizations.

To recognize higher near-term expectations and cash flows generated since our last valuation update, we are increasing our fair value estimate on Centene to $75 per share from $70 previously.

Including pressures through 2027, we expect 4% revenue growth compounded annually through 2030, and our fair value estimate depends on Centene's operating margins returning to about 2% by 2030, up from roughly breakeven in 2025. Currently, medical utilization appears elevated in most of its end markets, including the important individual plans and Medicaid population, which has pushed margins down substantially. Also, with Congress recently passing a budget reconciliation bill in 2025 that will cut into the Medicaid population (2027) and allow subsidies in the individual plan market to expire (2026), additional headwinds to revenue and profits in those markets may constrain margins in the near term. However, we still think margins should rise materially over time, as rates and utilization come more into balance, creating significant upside potential for Centene's profits if it can navigate its near-term challenges.

In April 2025, we downgraded our moat rating to none from narrow because of ongoing pressures in Medicaid related to mismatched rates and utilization and also regulatory challenges that could cut into Centene's economic profitability in its key end markets in the near term—Medicaid and the individual exchanges. Profits may remain under pressure at least through 2027, as medical utilization remains elevated in its individual and Medicaid end markets and as regulatory pressures mount on the individual exchanges (2026) and Medicaid (2027) in terms of both enrollment and potential mix pressures.

Medicaid Market Under Pressure Due to Mismatched Rates/Utilization and Regulatory Scrutiny

Centene is the leading provider of Medicaid’s managed care plans, which serve low-income individuals and people with disabilities. In a normalized environment, we expect that just under half of Centene’s profits will be generated from its Medicaid business, making that business the primary determinant of its moat rating and sources. Historically, we thought Centene benefited from cost advantages and customer switching costs in this unique medical insurance market, which garners very low margins in the best environment. Given the pressures that this market is under now with mismatched rates and utilization combined with regulatory scrutiny under Republican leadership, we view its path to durable economic profit generation in this end market as too uncertain to meet the "more likely than not" test that we require when assigning economic moat ratings, despite its significant scale, efficient operations, and effective programs that help it offer plans at lower rates than other private health insurers and contributes to its market-leading position in the Medicaid managed care business.

We also believe the Medicaid market has the potential to create switching costs through contractual obligations and entrenched relationships, and the strength of those switching costs makes the Medicaid business relatively unique in the health insurance industry. For example, employers typically only contract with a medical insurer for one year. In contrast, while contract terms vary by state, initial Medicaid contract lengths with managed care companies typically last three to five years. Additional renewal periods can lengthen those initial contract periods by several years as well, especially if the relationship is deemed satisfactory between a state and an MCO like Centene. Beyond these contractually stipulated arrangements, the relationships between a state and its managed care plan providers can last much longer than one request for proposal cycle. For example, the length of Centene and its predecessor firms’ relationships with state Medicaid plans averages over 15 years, by our calculations.

Other End Markets: Individual Plans Face Enrollment and Margin Challenges as Subsidies Expire

We see positive characteristics in Centene’s other major business segments—commercial (primarily plans for the individual exchanges) and Medicare. Both businesses typically enjoy higher margins than the firm’s Medicaid business, which could help the company generate excess economic profits eventually. However, the risks surrounding the individual exchanges make the intermediate-term outlook murkier than we would like for a narrow-moat firm.

On the exchanges, Centene claims the top position in the US and aims to be the cost leader in the geographies it serves. Like other insurance markets, we think price remains a key determinant of market share, especially in this price-sensitive population that includes the recently unemployed. Centene also strives to maintain continuity of services for seasonal employees who often shift between Medicaid and the exchanges throughout the year, depending on their seasonal income level. Brand recognition in this population, along with a low-priced offering, has helped Centene build the leading market share on the individual exchanges. Given the cost advantage and intangible assets inherent in the individual exchange business, we believe Centene’s individual exchange business could eventually help it redig an economic moat, if it can regain profitability after expired federal subsidies threaten enrollment and mix in that population starting in 2026.

In Medicare, though, we do not believe Centene has dug an economic moat yet and may not for a long time. In the Medicare Advantage business, which was primarily acquired through the WellCare merger in early 2020, Centene remains a second-tier player, and the organization may remain constrained by weaker star ratings (a measure of plan quality) than many of its peers, which affects marketing to seniors and bonus payments. With lower bonus payments, Centene may have trouble expanding the breadth and depth of its extra benefit offerings, which can limit the attractiveness of its plans for end users relative to Centene’s peers. Also, with those lower star ratings, Centene may have less profit to share with its provider networks, which can influence incentives for that key constituent group. We think brand awareness may be lower than key peers in this niche too, where intangible assets make a difference for end users, who are typically the primary decision-makers for these plans. While we think Medicare may wind up being a good growth and margin opportunity for Centene, we think the company probably has a lot of digging to do in this business to reach moaty status.

Centene represents a countercyclical investment opportunity in managed care, as it can benefit from economic downturns through increasing enrollment in its Medicaid and individual exchange products.

With a focus on government-sponsored programs, Centene could eventually benefit from potential US policy changes to reach universal affordable coverage in the long run.

With operating margins near breakeven levels, we see lots of potential to expand profits.

Republicans are taking aim at Centene's Medicaid and individual exchange strongholds as avenues to reduce federal spending, which is cutting into the company's profit prospects.

Centene's near- and long-term earnings power appears more uncertain than usual, creating risks for investors.

The company's large debt position may need to be refinanced, and accessing the debt market is not guaranteed, especially if profits do not rise substantially.