Humana stock continued to dive on Wednesday after revealing that one of its primary Medicare Advantage plans got downgraded in the government's star-rating system, which will hit profitability. UnitedHealth Group made a bullish move at the open. But UNH stock, a Dow Jones Industrial Average component, slashed initial gains.
Other Medicare Advantage players were mixed, with CVS Health rising and Elevance Health sliding.
Humana's Falling Stars
In a Wednesday filing, Humana said that only 25% of its Medicare Advantage members are currently enrolled in plans that will earn at least four stars in 2025 in the government's five-star system. That's down from 94% in 2024.
Humana highlighted one plan, H5216, with 45% of its MA members that barely missed the cutoff, and the company is challenging calculations made by the Centers for Medicare and Medicaid Services.
While Humana said the stars downgrade for 2025 won't impact 2024 or 2025 results, it expects a "revenue headwind" for 2026 that it is working to mitigate.
In a Sept. 27 note, Jefferies analyst David Windley wrote that Humana would face a "$9 EPS hole in 2026" if H5216 falls to 3.5 stars from 4.5, as appears to be the case.
On Tuesday, Stephens slashed its price target for HUM stock to 250 from 400, along with a downgrade to equal weight from overweight.
UnitedHealth Navigates Medicare Stars
The big picture is that higher utilization of services by Medicare Advantage members has been a challenge for the managed care industry. Companies like Humana and CVS Health that found they had been too generous with benefits have scaled back their offerings for next year.
On Monday, Windley wrote his firm was "encouraged by UNH's relatively conservative posture" in terms of Medicare Advantage benefits on offer for 2025. He noted that "UNH cut core benefits" and raised drug deductibles by at least 33%.
However, neither UNH stock nor management is signaling any stars fallout.
UnitedHealth issued a news release on its new Medicare Advantage plans on Tuesday that didn't mention star ratings
HUM And UNH Stock
After diving 11.8% on Tuesday as firms interpreted emerging data, HUM stock fell 11.8% on Wednesday to 246.49, off intraday lows of 213.31.
UNH rose 1.5%to 589.31 in Wednesday trade. UNH stock bounced off its 50-day moving average at the open, running up to 604.52 and flashing a buy signal, but quickly slashed gains before rebounding again. UnitedHealth stock has a four-weeks-tight entry of 607.94 as it works on a potential new base.
UNH is part of the IBD Long-Term Leaders Portfolio of names with the reliable earnings growth that make them conducive to buying on pullbacks.
CVS rose 2.5% on Wednesday, bouncing back after the prior day's 2.1% decline. However, CVS is wrestling with a business model that has yet to prove itself.
Elevance Health, after slipping 1.7% on Tuesday, gapped down 2.4% on Wednesday.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
