Humana shares sink on Medicare Advantage ratings woes, analyst downgrades

Humana Inc.'s stock fell sharply this week as the company revealed that changes to the quality ratings of its Medicare Advantage plans would hurt future bonus payments the company receives from the US government.

According to the Centers for Medicare and Medicaid Services (CMS), Humana has roughly 1.6 million or 25% of its members enrolled in plans that are rated four stars or higher for 2025 — a sharp decrease from 94% in 2024. Humana noted that a substantial driver of the change is due to one of its larger contracts decreasing from a 4.5-star rating in 2024 to a 3.5-star rating.

Medicare Advantage plans are health plans offered by private companies that are akin to the federal government's Medicare program for people 65 and older.

Humana shares closed at $316.74 on Monday Sept. 30 but ended Oct. 2, the date Humana publicly disclosed the negative expected impact of the change in quality ratings, at $246.49. As of close of business Thursday Oct. 3, Humana's shares traded at $241.78, a 32.3% drop from the prior week's close.

In a note, Stephens analyst Scott Fidel said the news represented a "worst-case scenario result" for the company, and he downgraded Humana to equal weight from overweight. Analysts from BofA Securities downgraded Humana to underperform from neutral and Piper Sandler also downgraded Humana to neutral from overweight.

Ratings cut

In a regulatory filing, Humana said it believes that the ratings cut on its Medicare Advantage plans was "driven by narrowly missing higher industry cut points on a small number of measures." Humana arrived at that conclusion after reviewing preliminary data provided by CMS.

"Humana believes there may be potential errors in CMS' calculation of certain of its results and industry threshold cut points," the company said in a filing. "[Humana] has outstanding appeals related to certain results and has requested additional information to ensure accuracy of threshold calculations."

The managed care insurer also said it would continue to "engage" with CMS to ensure that the ratings are both accurate and represent the quality of the plan.

Fidel noted that while the changes are not expected to impact the 2024 and 2025 earnings outlook, it does add "significant risk" to the company's ability to reach its target of individual Medicare Advantage margins of "at least 3%" by 2027. Fidel said he estimates the revenue at risk to stand somewhere above $3 billion or more.

When contacted for comment, a Humana spokesperson told S&P Global Market Intelligence that "although our quality measures are still very high, performance improvements across the industry and CMS methodology changes have raised the bar for achieving 4- and 5- Star performance for many measures." The spokesperson added, "We have initiatives already underway to improve our performance for future Star ratings."

Recovery time

The annual enrollment window for 2025 Medicare Advantage coverage will start in mid-October, with shoppers having until Dec. 7 to lock in coverage for the following year.

In a note, BofA Securities analyst Joanna Gajuk said that although Humana's appeal of the CMS decision could be resolved as soon as Oct. 10, there is still a risk that the "full recovery might take longer than expected." She noted that Elevance Health Inc. went through a similar appeal process last year and was successful.

Gajuk said that Humana could reduce the amount of benefits offered in response to the loss of the bonus and rebates, but she added that there are limits as to how much the company could slash benefits in a year. Gajuk also said Humana could try to offset the headwind by managing costs but caveated that it will likely be harder for the managed care insurer to find more savings.

In terms of the timing of a recovery, Gajuk said it remains uncertain. This is especially the case if Democrats come out with a win in the election and Medicare Advantage plans are "pressured" as they are now with the lower stars rating.

"Meanwhile with the loss in stars, Humana is on track to earn near zero margins in Medicare Advantage through at least 2026, forcing them into an even less competitive position versus peers such as UnitedHealth Group Inc., which saw more stable quality scores," Gajuk said. "As such we think there is a risk that Humana loses some market share."