Humana tumbles as insurer falters in Medicare star ratings

(Bloomberg) — Shares of Humana Inc. plunged in premarket trading after the insurer reported a decline in key Medicare Advantage quality ratings that threatens to sharply reduce revenue.

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About a quarter of members in plans Humana manages for the U.S. Medicare program for the elderly were in four-star plans, down from 94%, Humana said Wednesday. The company said it believes the Centers for Medicare and Medicaid Services' calculations were flawed and has appealed some of the findings.

Shares fell 21% before U.S. markets opened. If this continues in regular trading, Humana faces its biggest decline since January 6, 2022.

The result, if left in place, would be disastrous for the Medicare-focused insurer. Humana has already suffered profit losses due to medical costs and stricter government reimbursements. Insurers will receive more money for tariffs with top ratings in the coming years, so cuts in ratings, so-called stars, could lead to a loss of sales.

The ratings evaluate the quality of care and customer service for private Medicare health plans, which now cover more than half of all program participants. It's a high-risk calculation for insurers that has resulted in an estimated $11.8 billion in bonus payments to insurers this year, including $2.5 billion to Humana, according to health care researcher KFF.

Profit collapse

Humana could see a $9 per share drop in earnings in 2026 if valuations of its key Medicare contract fall below the level that earns bonuses, a Jefferies analyst said last week. The company confirmed in a filing Wednesday that that contract, which covers nearly half of Humana's Medicare Advantage membership, has fallen in ratings for 2025.

The ratings downgrade “is much worse than even pessimistic investors believed,” Mizuho's Jared Holz wrote in a note on Wednesday.

The ratings are not expected to have an impact on the company's financial outlook for 2024 or 2025, Humana said, adding that the company was “disappointed with its performance” and has initiatives underway aimed at improving its operating discipline and return to an industry-leading star position as quickly as possible.”

The cut raises hurdles for Humana Chief Executive Jim Rechtin, who took over in July. Other companies have successfully challenged Medicare's assessment of their quality ratings. Elevance Health Inc. and nonprofit SCAN Health Plan sued CMS last year over the way it handled their ratings and ultimately recovered funds at risk.

The story continues

“Humana is evaluating all available options to mitigate the expected decline in revenue in 2026 associated with its star ratings in 2025 if its challenges to the results are unsuccessful,” the company said in a statement.

Shares of Humana had fallen 39% so far this year through Tuesday's close. In comparison, the S&P 500 rose 20%.

Tougher business

Although the official rating files have not yet been released, some are visible on Medicare's Plan Finder tool, which helps consumers search for coverage. Two major plans from CVS Health Corp. appears to be maintaining 4-star ratings on the site, analysts at Evercore ISI said in a note on Wednesday. CVS shares rose as much as 4.6% in trading before U.S. markets opened.

The private Medicare Advantage program has long fueled growth for U.S. health insurers, but in recent years rising medical costs combined with policy changes have made business more difficult. The Biden administration has limited reimbursements, suppressed aggressive marketing and advertising and restricted some practices that insurers used to boost revenue.

The program evaluates plans each year with new star ratings determined before the annual enrollment window, which begins October 15. So far, there's little sign that any of Humana's competitors have taken such a big hit.

Overall, payments from quality incentives rose from about $3 billion in 2015 to nearly $13 billion last year, according to KFF, as more people enrolled in Medicare Advantage and membership in highly rated plans increased. Overall ratings declined in 2024 following the expiration of pandemic-era guidelines, helping to support some quality ratings.

– With support from Angel Adegbesan.

(Updates with additional context and analyst commentary beginning in paragraph 5.)

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