Humana Inc., a major health insurance provider, is grappling with a substantial decline in its Medicare Advantage Star Ratings for 2025, a development that has sent the company's shares tumbling. According to recent announcements, only about 25% of Humana's members are now enrolled in plans rated four stars or higher, a stark contrast to the 94% who were in such plans the previous year.
This sharp decline is largely attributed to a lower rating for a key contract that covers nearly half of Humana's Medicare Advantage membership. The drop in ratings is expected to impact the company's quality bonus payments in 2026, posing significant financial risks. Humana has indicated that it suspects potential inaccuracies in the calculations performed by the Centers for Medicare and Medicaid Services (CMS) and has appealed some of the findings.
Financial Implications
The financial repercussions of this decline are considerable. Humana's shares plummeted by 24% in premarket trading, marking the company's most substantial decline since February 23, 2009. If the ratings remain unchanged, the company could face a hit of $9 per share in earnings by 2026, as noted by a Jefferies analyst. This comes on top of existing pressures from rising medical expenses and stricter government reimbursements.
Higher-rated Medicare Advantage plans typically receive more funding in future years, making the drop in ratings particularly detrimental to Humana's revenue stream. The company has expressed disappointment in its performance and is actively working on strategies to enhance operational discipline and regain a leading position in Star ratings as swiftly as possible.
Operational and Strategic Response
Humana is exploring all options to alleviate the anticipated revenue challenges in 2026, should their appeals to CMS be unsuccessful. The company remains committed to enhancing value for its customers and shareholders. New CEO Jim Rechtin, who assumed the role in July, faces the challenge of navigating these difficulties while implementing improvement strategies.
Other health insurers have successfully contested CMS's evaluations in the past. For instance, E Health Inc and SCAN Health filed lawsuits last year and ultimately recovered at-risk funds. This precedent offers some hope for Humana as it navigates this critical period.
The decline in Humana's stock performance is also reflected in its year-to-date figures, with shares decreasing by 39% as of the close on Tuesday, in contrast to a 20% rise in the S&P 500.
Broader Industry Context
The Medicare Advantage program, a part of the broader Medicare system in the United States, allows private health insurers to offer Medicare benefits. The Star Ratings system is crucial for determining the quality and funding of these plans. A lower rating not only affects the insurer's revenue but also impacts the quality of care provided to beneficiaries.
As Humana works to address these challenges, the company's focus on enhancing operational efficiency and improving its Star ratings will be critical in regaining investor confidence and ensuring the continued delivery of high-quality healthcare services to its members.
