A fund that invests in growth stocks has bought an insurance company whose earnings have shrunk. This is the Humana story that appeared in the Baron Health Care Fund's Q3 2026 letter. Net purchases for the quarter were approximately $1.2 million, and the reason the management team itself gave was the opportunity for a margin recovery.[1] How different a judgment is it to buy a growing business versus buying a company waiting for a recovery?
What Recovery Looks Like Through a Growth Investor's Eyes
The Baron Health Care Fund, managed by Neal Kaufman, touts a strategy of finding growth companies with competitive advantages and holding them for multiple years. At the end of Q3 it held 33 positions, and Biogen, newly added that same quarter, was among its top net purchases.[1] In the sense that it puts money in based on future business changes rather than near-term results, Humana is not an entirely unfamiliar choice.
That said, there is no need to conclude from this single holding that the fund has switched its style to value investing. The more natural reading is that, within the long-term trend of medical demand from an aging population, it found a business whose current earnings are abnormally depressed. A good growth company that keeps growing and a company in a growing market reclaiming its profitability may travel different roads yet arrive at the same question: whether the price being paid today is attractive relative to the money the business will leave behind.
Note that the $1.2 million is neither the investment amount of Baron's entire firm nor a current holding value. It is the amount this particular fund net-purchased in that quarter.[1] This piece focuses on the reasoning behind the allocation, rather than the investor's reputation.
Premiums and Hospital Costs Do Not Move at the Same Speed
Humana's core business is Medicare Advantage (MA). It is a structure in which private insurers offer medical coverage products to U.S. Medicare enrollees, and in this business what matters is how much actual medical costs run relative to premiums and government payments.
The problem is that the two numbers are set at different points in time. Insurers design next year's products and prices in advance, but how much enrollees will actually use hospitals becomes known only later. Even if medical utilization rises far more than expected, the product terms already set cannot be immediately repriced. Baron's letter likewise explains this repricing lag as the reason the margin recovery has been delayed.[1]
Humana's insurance segment benefit ratio in Q2 2026 was 91.2%. The full-year outlook maintained a range of 92.75% plus or minus 0.25 percentage points.[3] Most of premium revenue goes out as medical costs, and operating expenses must also be borne from what remains. That is why small differences in ratios have a large impact on earnings. However, this insurance segment-wide ratio should not be treated as the same metric as the pre-tax margin of individual MA products.
Yet spending less on medical costs and running the company more efficiently are different improvements. While the insurance segment's Q2 benefit ratio rose from 89.9% a year earlier to 91.2%, the operating cost ratio fell from 8.3% to 7.1%.[5] The company cited operating leverage from membership and revenue growth, cost savings, and work redesign as reasons for the operating ratio improvement.[9] In other words, an increase in earnings does not mean the medical cost burden has lightened. And because the two ratios have different denominators, MA margins cannot be calculated by simply adding and subtracting them.[9]
Raising premiums is not the only means of recovery. There are also ways to adjust product mixes in less profitable regions, improve enrollee health management, and manage medical cost growth through value-based care.[1][4] If enrollees leave while prices are being adjusted, or if medical utilization again exceeds expectations, the plan's effect can weaken. That is why a margin recovery is not as simple as it sounds.
The composition of new members is not merely a vague risk. In its Q2 disclosures, the company explained that even excluding the revenue reduction impact tied to quality ratings, the average benefit ratio for new individual MA members is higher than that of retained existing members.[5] That is why a decline in membership driven by product withdrawals or benefit adjustments cannot, in itself, be judged a failure, nor can membership growth be judged an immediate success. The effect of repricing can vary depending on which members are retained in the products left behind and how many are re-enrolled into other products. The company also stated that its 2027 bid design must produce progress toward its 2028 margin target.[4]
The Year Attached to a Quality Rating Is Not the Year the Money Arrives
One part of reading Humana that is especially easy to confuse is the U.S. government's insurance product quality rating system (Star Ratings, hereafter "quality ratings"). It is a system in which CMS, the U.S. agency overseeing Medicare, evaluates the quality of MA products and contracts and expresses it in stars. It is not a single score awarded to an insurer as a whole, and these ratings affect insurers' bonus and rebate structures. But the year attached to a quality rating and the year it is actually reflected in bonuses are different.
Humana's disclosure filed on October 9, 2026 makes this distinction clear. The company stated that in the final 2027 MA Star Ratings results provided by CMS the previous day, it exceeded its self-set Top Quartile target. The year this score connects to is the 2028 bonus year.[2] Reading news of improved quality ratings as a statement that this year's earnings will immediately rise misreads the clock.
"Top Quartile" is also not the same as a simple average quality-rating rank. The company uses its own definition: quality-rating-related revenue per member that is higher than the median of a peer insurer group.[2] Specifically, it means quality-rating revenue per member per month that is 10% higher than the peer-group median. This comparison uses CMS's September 2026 member and contract distribution, calculated while holding payment benchmarks, risk scores, and other factors equal. The company stated that actual 2028 revenue will vary depending on the member and contract mix and payment conditions at that time.[2] What matters for the stock price is not the rating's name itself but how much that rating connects to product competitiveness and revenue.
A press release the company issued the same day shows the breadth of the improvement at the member and contract level. In the 2027 Star Ratings, 95% of Medicare Advantage members are in plans rated 4.0 stars or higher, and 42% of members are in 4.5-star plans. There are 6 contracts at 4.5 stars and 12 at 4.0 stars, an increase of 11 contracts rated 4.0 or higher versus a year earlier, and its prescription drug plans (PDP) also received 4.5 stars.[7] Whether by the company-defined "quality-rating-related revenue" measure or by the volume measures of members and contracts, the point is the same: the improvement was broader than the luck of a single contract. Reuters noted that only 20% had been at 4 stars or higher a year earlier, and reported that the stock jumped sharply immediately after the announcement.[8] But the stock's pop is expectations about the news, not earnings after the 2028 bonus has actually been reflected in revenue.
It is not all good news, either. The company cautioned that part of the outperformance versus its 2028 target may be one-time in nature.[2] That means it will not treat all of the improved results as permanent gains. Investors expecting a recovery need to look both at the fact that the target was exceeded and at whether that performance can be repeated.
Between 2026's Low Earnings and the 2028 Target
Humana's 2025 adjusted EPS was $17.14. The 2026 guidance is at least $9.00, and the company reaffirmed this outlook in its October quality-ratings disclosure as well.[2][3] Compared with the prior year's results at the $9 floor, that is about 47.5% lower. Note, however, that this is a comparison based on the minimum, not the rate of decline in full-year results that have not yet been finalized.
The accounting basis must also be separated. At the July 29 announcement, full-year 2026 GAAP EPS guidance was at least $6.52, on a different basis from adjusted EPS.[3] The October 9 disclosure, however, reaffirmed adjusted EPS of at least $9 while stating that GAAP guidance could change depending on ongoing strategic actions and other factors.[2] If you cherry-pick favorable numbers to explain the depressed earnings, the very starting point of the recovery can shift.
Membership and cash flow offer further clues. Through Q2, individual MA membership rose about 1,204,000, or 23%, from the start of the year.[4] First-half operating cash flow was approximately $3.22 billion, up from about $1.6 billion in the same period a year earlier.[5] The business is not disappearing, but membership growth does not necessarily mean earnings growth. If the margin on newly enrolled members is thin, the recovery can be delayed even as the top line grows, and an insurer's cash flow is also affected by payment timing and working capital.
Consolidated cash flow and the cash the holding company can spend must also be distinguished. Humana is a holding company dependent on dividends from its insurance subsidiaries and reimbursements of management fees, and dividends sent up from subsidiaries are subject to state-level regulation and approval requirements.[9] The roughly $15.5 billion in statutory capital and surplus of the subsidiaries and the $8.2 billion minimum regulatory requirement presented in the 10-Q are as of March 31, 2026, based on statutory financial statements. The entire difference should not be read as cash immediately available for buybacks or dividends.[9] The company itself also explains that because premiums come in before claims are paid, rapid membership growth can improve operating cash flow.[9] Whether there is cash to endure the recovery and whether there is capacity to return that cash to shareholders are two different questions.
There are also two clocks inside the business. Q2 insurance segment operating income was $820 million, up 7.0% year over year, while CenterWell—the segment bundling pharmacy, primary care, and home health services—posted operating income of $466 million, up a steep 35.5%. CenterWell's share of combined segment operating income grew from 31.0% a year earlier to 36.2%, and CenterWell's senior primary care patients grew by 130,900 in the first half alone, 27% more than at the start of the year.[4][5] On a first-half cumulative basis, insurance segment operating income actually declined 3.6%.[5] Even if consolidated results improve, one must distinguish whether the improvement comes from insurance margin recovery or from CenterWell growth in order to test Baron's very thesis of "MA margin recovery." Whether the recovery thesis and the business growth point in the same direction is worth checking separately every quarter.
The destination management has laid out is a sustainable individual MA pre-tax margin of at least 3% in 2028.[4] This is a target, not an achieved result. Improvement in quality ratings, product redesign, and medical cost management must all move in the same direction until that point.
The policy environment also needs separate attention. The 2027 payment policy CMS finalized in April projected an industry-average net payment increase of 2.48%.[6] This is neither a newly announced October rate increase nor a finalized increase Humana will receive as-is. It is an industry-level condition whose outcome varies by company depending on enrollee mix, risk adjustment, quality ratings, and so on.
The Blanks in the Math That Says It's Cheap Once Earnings Recover
In its letter, Baron cited the company's 2025 investor day framework and discussed the possibility of 2028 EPS of $36 to $44.[1] This is neither current confirmed earnings nor a forecast whose realization is guaranteed. It means a considerable portion of the math that makes the stock look cheap depends on those future earnings.
To get a sense of scale, consider the quarter-end market capitalization of $45.8 billion cited in the letter and the approximately 121 million diluted weighted-average shares in the 2026 guidance.[1][5] Plugging in $9 of EPS yields a multiple of about 42x in a simple calculation, but plugging in $36 to $44 yields roughly 9x to 11x. This is a reference calculation to see how different earnings assumptions change the valuation, not the actual PER as of the time of writing. And because the as-of date of the market capitalization and the nature of the average share count differ, it cannot be taken as a precise current valuation. Nor can the composition of normalized earnings be assumed to be the same as before. Membership is growing rapidly,[4] and with CenterWell's share having grown,[5] even the same consolidated EPS likely reflects a different mix of insurance margin recovery and health services growth than at the time of the 2025 investor day. Depending on which side the earnings come from, the score for repeatability changes too.
The diluted share count—the actual denominator of EPS—also deserves separate scrutiny. The company spent $103 million on buybacks under its first-half 2026 repurchase plan, and $2.7 billion remained authorized as of July 28.[9] The remaining authorization is not a commitment to execute, and net income rising is a different pathway from buybacks lifting earnings per share. Even when pinning hopes on normalized EPS, it is best not to bundle these two effects and count them as a given.
The blanks in this calculation ultimately come down to probability and time. If normalized earnings come in lower than expected or arrive later, the multiple that looked low will change. Conversely, assuming that low earnings simply persist forever means missing the recovery potential altogether. Investing in recovery stocks is less about picking a cheap number and closer to judging which earnings are repeatable.
That makes the things to check concrete: whether medical cost trends stay within the assumptions made at product design, whether membership growth goes hand in hand with profitability, and how much of the quality-rating improvement is repeatable—all tracked quarter by quarter. The company said it will review progress against the 2025 investor day framework at its December 10 investor update.[2] More important than hearing optimistic targets again will be how much the gap to those targets has narrowed.
Conclusion
The Baron Health Care Fund's purchase of Humana reads less like a choice to ignore currently low earnings and more like a choice made after weighing why earnings are depressed and how long a recovery requires. Even with growing medical demand, different clocks run until prices are reset, costs are managed, and quality bonuses are restored.
October's quality-rating results are evidence that one of those clocks moved in a good direction. But that alone does not lock in 2028 earnings. Perhaps the key to this purchase lies not in patiently waiting for recovery in the abstract, but in breaking the big recovery story into small milestones that can be verified. Humana's turnaround will be confirmed bit by bit not by the target margin but by actually passing those milestones. The first milestone—the quality ratings—was passed with a wide margin.[7] The remaining milestones are repricing, medical costs, and checking quarter by quarter which side—insurance or CenterWell—is driving earnings.
References
[1] Baron Health Care Fund — Q3 2026 letter
[2] Humana — 2027 Star Ratings / 2028 bonus year update, Form 8-K, October 9, 2026
[3] Humana — Q2 2026 results and full-year guidance, July 29, 2026
[4] Humana — Q2 2026 management presentation materials, July 29, 2026
[5] Humana — Q2 2026 detailed results materials, July 29, 2026
[6] CMS — 2027 MA and Part D payment policies finalized, April 6, 2026
[9] Humana — Q2 2026 Form 10-Q: segment results, regulatory capital, and holding company liquidity
Disclaimer: This article is informational content summarizing disclosures, analysis, and the author's views; it is not a recommendation to buy or sell any particular stock.