Humana's 2026 financial results face potential challenges due to the risk of losing its Medicare Advantage quality star ratings for 2025, as noted by analysts at BofA Securities in a recent communication. The expectation is that the number of members enrolled in 2025 Medicare Advantage plans with a quality rating of at least four stars may decline sharply, which could have significant implications for Humana's revenue and bonus payments for 2026.
Humana has communicated that it has outstanding appeals related to certain ratings published by the Centers for Medicare and Medicaid Services (CMS) and has requested more detailed information regarding these outcomes. Analysts estimate the revenue reduction could exceed 3.5% due to lost bonus payments, translating to an approximated $23 per share impact on Humana's earnings for 2026 prior to considering any mitigating factors.
This forecast poses a daunting challenge, potentially reducing the earnings outlook for 2026 to $13 per share, a significant decrease from the prior estimate of $25. Analysts predict that Humana might be able to offset nearly half of this impact through adjustments in capitation and benefit cuts. Consequently, BofA Securities has revised its rating on Humana's stock, downgrading it from neutral to underperform, and has adjusted its price target from $376 to $247.
The stock market reflects this sentiment, with Humana's shares dropping 2.6% in Thursday afternoon trading, on the heels of a nearly 12% tumble the prior session. In the scope of year-to-date performance, Humana's stock has plummeted by 47%. The decline in expected star ratings could further postpone the recovery of margins, which may adversely impact the perception of Humana by seniors and brokers during the impending open enrollment period.
For context, Elevance Health was involved in an appeals process in 2023 and emerged successfully, while CVS Health managed to reclaim its star ratings after a year without an appeals process. In contrast, acquiring similar ratings is projected to take multiple years for Centene, according to Gajuk's notes. To minimize the financial impacts stemming from potential bonus and rebate losses, Humana might consider reducing the benefits offered and diligently managing costs.
Nonetheless, locating additional savings could prove to be difficult, particularly since enhancing star ratings will necessitate strategic investment. Humana anticipates that CMS will provide formal disclosures regarding 2025 star ratings by October 10. The timeline for recovery remains uncertain, especially with the possibility of a Democratic victory in the upcoming elections which could place additional pressure on Medicare Advantage plans by enforcing lower star ratings.
If these star rating losses are realized, Humana may find itself operating near-zero margins within its Medicare Advantage segment until at least 2026. Such a scenario would heighten the risk of losing market share to competitors like UnitedHealth Group. On a related note, Humana is set to unveil its third-quarter financial results on October 30, a date that investors will be closely monitoring..