Humana hit by disturbing Medicare Advantage change

The last thing any investor wants to hear are the words “worst case scenario”.

And yet that was the term analysts at Stephens used on Oct. 2 to describe Humana’s current situation after the health insurer said a lower performance rating for a Medicare insurance plan used on large scale affected enrollments for 2025 and could affect earnings and bonus payments in 2026.

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Shares of the Louisville, Ky.-based company were down nearly 18 percent at last check. Humana shares are down 50% year to date.

Humana said in an 8-K filing with the Securities and Exchange Commission disclosing preliminary 2025 Medicare Advantage Star results that only about 25%, or about 1.6 million, of its members were in 4+ Star plans for the year plan 2025 or pay year 2026, compared to about 94% in the previous year.

“The company has outstanding appeals related to certain results and has requested additional information to ensure the accuracy of the threshold calculations,” Humana said in the filing.

Analysts react to Humana’s latest disclosure.

Humane

TheStreet Pro: Humana’s Long-Term Picture ‘Not Encouraging’

In addition, the company said it plans to continue to engage with the Centers for Medicare and Medicaid Services “on these matters to ensure that star ratings are accurate and representative of plan quality.”

Humana said a big driver of the results was Medicare Advantage PPO plan H5216, which fell to a 3.5-star rating from a 4.5-star rating in 2024.

Related: Analysts Revise Humana Share Price Targets Amid Medicare Advantage Hit

H5216 contains approximately 45% of Humana’s MA subscription, including more than 90% of its employer group waiver plan subscription. The decline in Stars’ performance for 2025 will affect Humana’s quality bonus payments in 2026, Humana said.

Star ratings, on a scale of 5, determine reimbursement levels and can influence enrollees when choosing plans.

The agency is expected to officially reveal the star details for 2025 on or around October 10.

In August, TheStreet Pro’s Bruce Kamich expressed concern about Humana stock, noting that “in the short term, it looks like HUM may bounce a bit, but the long-term picture is not encouraging.”

Stephens downgrades Humana shares

Stephens downgraded Humana shares to equal weight from overweight, with a $250 price target, down from $400, after the disclosure.

This represents “a worst-case scenario outcome,” the firm said, adding that the reduction was driven by Humana “just missing higher industry cut points for a smaller number of measures.”

While not expected to affect the 2024/2025 earnings outlook, the resulting star ratings add significant risk to Humana’s ability to achieve target individual Medicare Advantage margins of “at least 3%” by 2027, the firm said. Stephens estimates the revenue at risk to exceed $3 billion by 2026.

Related: CVS Considers Tough Changes Amid Declining Profits

Wolfe Research analyst Justin Lake said the weakness in Humana stock was “hard to understand at first.” Early focus was on the benefits, which seemed quite conservative, and then the company’s lack of Star Rating mention in its 2025 Medicare Advantage press release, given that the company said in its 2024 release that it was the industry leader for Stars .

“(Everything) came into focus in the afternoon” when it became clear that investors had potentially found a way to “flip” into the 2025 star ratings using the CMS Planfinder website, Lake said.

Analyst cites confusion with star rating

Using a solution to get an early view of the Stars is “unproven at best,” but the firm noted that if this method of supporting Star 2025 results proves predictive, it would indicate that Humana could see a deterioration ” surprising” by 67% of the membership. in the 4-star plans for 2025, after analyzing 94% of all members.

Wolfe has an outperform rating on Humana stock.

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Barclays said Humana and Alignment Healthcare (ALHC) traded lower amid confusion over Medicare Advantage star rating, TheFly reported.

The sales were due to concerns about the 2025 Star Ratings impacting 2026 plan revenue, caused by what could have been a potential technical error on the Medicare Plan Finder website, the firm said.

When the Medicare Advantage Plan Finder website is available, it displays the most recent star rating for each plan. Because CMS has not released 2025 Stars, the website displays “Star Rating: Coming Soon” for this year’s plans, Barclays said.

Filtering plans by stars shows Humana’s largest H5216 contract and Alignment’s H3815 contract no longer have 4-star ratings, while CVS Health (CVS) Two large contracts H5521 and H5522 remain above 4 stars, the firm said.

After the market closed on October 1, it remained unclear whether the Plan Finder website was a reliable indicator of the stars, according to Barclays. The company’s review of the 650 published plan documents for CVS signals that the company is well positioned to improve its margins.

Humana is due to report Q3 on October 30

Humana is scheduled to report third-quarter earnings on Oct. 30.

The company beat Wall Street’s second-quarter earnings expectations in July, but its shares fell after Humana cited higher-than-expected admissions and declined to raise its full-year guidance.

Instead, Humana reported full-year EPS of about $16, which CEO James Rechtin said “cautiously assumes that higher inpatient costs will continue even as we work to mitigate this pressure”.

In January, Humana cut its EPS guidance to about $16 for the year, down from its previous estimate of about $25.

“Today’s headline is that our second quarter results beat expectations,” he told analysts. “We feel good about where we are at mid-year, but we experienced pressure on medical costs in the quarter.”

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