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 widely used Medicare insurance plan hurt enrollments for 2025 and could potentially hit revenue and bonus payments in 2026.
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Shares of the Louisville, Ky., company were down nearly 18% at last check. Humana's stock is down 50% year-to-date.
Humana said in a Securities and Exchange Commission 8-K filing disclosing preliminary 2025 Medicare Advantage Star results that only about 25%, or roughly 1.6 million, of its members were in 4+ Star plans for plan year 2025 or payment year 2026, compared with about 94% in the prior year.
"The company has outstanding appeals related to certain results and has requested additional information to ensure accuracy of threshold calculations," Humana said in the filing.
Humana
TheStreet Pro: Humana's longer term picture 'not encouraging'
In addition, the company said that it intended to continue to engage with the Centers for Medicare and Medicaid Services "on these matters to ensure Star ratings are accurate and representative of plan quality."
Humana said that a significant driver of the results was the Medicare Advantage PPO plan H5216 decreasing to a 3.5-star rating from a 4.5-star rating in 2024.
Related: Analysts revisit Humana stock price targets amid Medicare Advantage hit
H5216 contains about 45% of Humana’s MA membership, including greater than 90% of its employer group waiver plan membership. The decline in Stars performance for 2025 will affect Humana’s quality bonus payments in 2026, Humana said.
The Star ratings, on a scale of 5, determine reimbursement levels and can sway enrollees as they choose plans.
Star-rating details for 2025 are expected to be formally released by the agency on or around Oct. 10.
In August, TheStreet Pro's Bruce Kamich raised concerns about Humana's shares, noting that "in the short run, it looks like HUM can bounce a bit, but the longer-term picture is not encouraging."
Stephens downgrades Humana stock
Stephens downgraded Humana shares to equal weight from overweight with a price target of $250, down from $400, after the disclosure.
This represents "a worst-case scenario result," the firm said, adding that the reduction was driven by Humana "narrowly missing higher industry cut points on a smaller number of measures."
Although 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 at more than $3 billion for 2026.
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Wolfe Research analyst Justin Lake said weakness in Humana shares was "initially difficult to understand." Early focus was on benefits, which looked reasonably conservative, and then on the company's lack of Star Rating mention in its 2025 Medicare Advantage press release, given that the company did note in its 2024 release that it was the industry leader on Stars.
“[Everything] came into focus in the afternoon,” when it became clear that investors had potentially found a way to "back into" 2025 Star ratings using the CMS planfinder website, Lake said.
Analyst cites Star Rating confusion
Using a workaround to get an early view on Stars is “unproven at best,” but the firm found that should this method of backing into 2025 Star results prove predictive, it would indicate that Humana may see a “startling” 67% deterioration in membership in 4 Star plans for 2025 after analyzing 94% of total membership.
Wolfe has an outperform rating on Humana shares.
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Barclays said that Humana and Alignment Healthcare (ALHC) traded down amid Medicare Advantage star rating confusion, TheFly reported.
The selloffs were due to due to concerns around 2025 Star Ratings affecting 2026 plan revenue, driven by what could have been a potential technical glitch on the Medicare Plan Finder website, the firm said.
When the Medicare Advantage Plan Finder website goes live, it displays the latest Star Rating for each plan. Since CMS has not released 2025 Stars, the website shows "Star Rating: Coming Soon" for this year's plans, Barclays said.
Filtering plans by stars indicates Humana's largest contract H5216 and Alignment's H3815 contract no longer hold 4-star ratings, whereas CVS Health's (CVS) two large contracts H5521 and H5522 remain above 4 stars, the firm said.
Following the market's Oct. 1 market close, it remained unclear whether the Plan Finder website is a reliable indicator of stars, according to Barclays. The firm's analysis of the 650 plan documents released for CVS signals the company is well positioned to improve its margins.
Humana set to report Q3 on Oct. 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 tumbled after Humana cited higher-than-expected inpatient admissions and declined to raise its full year guidance.
Humana instead affirmed its full-year EPS of about $16, which CEO James Rechtin said “prudently assumes that the higher inpatient costs will continue even as we work to mitigate that pressure.”
In January, Humana lowered its EPS guidance to about $16 for the year, down from its previous estimate of about $25.
"The headline today is that our second quarter results exceeded expectations," he told analysts. "We feel good about where we are at midyear, but we did experience some medical cost pressure in the quarter."
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