Humana plunges as Medicare quality rating drop threatens revenue

(Bloomberg) — Humana Inc. (HUM) shares plummeted the most in 15 years after the insurer suffered a drop in Medicare Advantage quality ratings, posing a drastic threat to revenue.

Most Read from Bloomberg

About a quarter of members in plans that Humana manages for the US Medicare program for the elderly were in four-star rated plans, down from 94%, Humana said Wednesday. Higher rated plans generate bonus payments to insurers. The company said it believed there may be errors in calculations by the Centers for Medicare and Medicaid Services and that it had appealed some of the results.

The shares fell 22% when markets opened in New York, the most since 2009.

The result would be catastrophic for the Medicare-focused insurer if it stands. Humana has already has seen profits squeezed by medical costs and tighter reimbursements from the government. Insurers get more money in future years for top-rated plans, so cuts to the ratings, known as stars, can sink revenue.

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

Earnings Hit

Humana could see an earnings hit of $9 a share in 2026 if ratings on its main Medicare contract fell below the level that earns bonuses, a Jefferies analyst said last week. The company confirmed in a filing Wednesday that that contract, which covers almost half of Humana’s Medicare Advantage membership, had slipped in ratings for 2025.

The cut to ratings “is far worse than even bearish investors believed would be the outcome,” Mizuho’s Jared Holz wrote Wednesday in a note.

The ratings aren’t expected to impact the company’s financial outlook for 2024 or 2025, Humana said, adding that it was “disappointed with its performance and has initiatives underway focused on improving its operating discipline and returning to an industry leading Stars position as quickly as possible.”

The cut adds to the hurdles faced by Humana Chief Executive Officer Jim Rechtin, who took over in July. Other companies have successfully challenged Medicare’s assessment of their quality ratings. Elevance Health Inc. and the nonprofit SCAN Health Plan last year sued CMS over how their ratings were assessed, ultimately recovering money that was at risk.

“Humana is exploring all available options to mitigate the expected 2026 revenue headwind related to its 2025 Star ratings in the event its challenges to the results are unsuccessful,” the company said in a statement.

Shares in Humana were down 39% so far this year as of Tuesday’s close. That compares to a 20% increase in the S&P 500.

Tougher Business

While the official ratings files haven’t been released, some are visible on Medicare’s plan finder tool that helps consumers shop for coverage. Two large plans from CVS Health Corp. appeared to retain 4-star ratings on the website, Evercore ISI analysts said Wednesday in a note. CVS shares rose as much as 4.6% in trading before US markets opened.

The private Medicare Advantage program has long fueled US health insurers’ growth, but in recent years rising medical costs combined with policy changes have made it a tougher business. The Biden administration has limited reimbursements, cracked down on aggressive marketing and advertising, and curtailed some practices that insurers used to boost revenue.

The program rates plans each year with new star ratings determined ahead of the yearly enrollment window that begins Oct. 15. So far there are few signs that any of Humana’s rivals suffered such a big hit.

Overall, payments from quality bonuses increased from about $3 billion in 2015 to almost $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 after the expiration of pandemic-era policies that helped prop up some quality ratings.

—With assistance from Angel Adegbesan.

(Updates with additional context and analyst comment starting in paragraph 5.)