In a recent regulatory filing, Humana Inc (NYSE:HUM). disclosed a significant reduction in its Medicare Advantage (MA) Star Ratings for the upcoming year. The company, a major player in the health insurance market, reported that only about 1.6 million, or 25%, of its members are enrolled in plans rated 4 stars and above for 2025. This marks a substantial decrease from the 94% of members in such highly-rated plans in 2024.
The decline was largely attributed to one of Humana's contracts, H5216, which fell to a 3.5-star rating from a 4.5-star rating the previous year. This contract accounts for roughly 45% of Humana's MA membership, including over 90% of its employer group waiver plan membership.
As a result of the lower Star Ratings, Humana anticipates a negative impact on its quality bonus payments in 2026. The Centers for Medicare and Medicaid Services (CMS) are expected to formally release the 2025 Star rating details around October 10th.
Humana has indicated that the drop in ratings was due to narrowly missing higher industry cut points on a few measures. The company has raised concerns about potential errors in CMS's calculations and has filed appeals regarding certain results. Humana is actively engaging with CMS to ensure the accuracy and fairness of the Star ratings.
Despite the challenges, Humana is proactively implementing initiatives to improve its operational discipline and return to a leading position in the industry. These efforts are designed to enhance member and provider engagement, customer experience, and technology integration, which are expected to positively influence future quality bonus payments from 2027 onwards.
Humana is also exploring options to mitigate the anticipated revenue shortfall related to the 2025 Star ratings. However, the company has stated that these ratings will not affect its financial results or outlook for 2024 or 2025. Humana continues to aim for an individual MA margin target of at least 3 percent, although it acknowledges increased risk in achieving this goal by 2027.
This report is based on a statement from a press release and reflects the company's forward-looking views, subject to the risks and uncertainties outlined in its SEC filings.
In other recent news, Humana Inc. reported strong growth in its Medicare business, leading to a robust performance in the second quarter of 2024 that surpassed expectations. Despite increased inpatient costs, the company managed these pressures through clinical appropriateness and provider negotiations.
Humana also reaffirmed its full-year adjusted earnings per share (EPS) and benefit ratio guidance for 2024, indicating a positive outlook for future growth, particularly in the Medicaid and CenterWell businesses.
The company raised its revenue guidance by $3 billion, primarily due to membership growth. However, Humana anticipates higher inpatient volumes will increase the medical loss ratio (MLR) in the latter half of the year. To manage costs, the company is focused on driving process redesign with automation technology and is undergoing a strategic review of general and administrative expenses.
Jefferies reiterated its Buy rating on Humana, addressing investor concerns around the potential downgrade of Humana's PPO contract H5216. The firm believes the calculations favor Humana, anticipating a 4-star result as the more likely scenario.
RBC Capital maintained its Outperform rating on Humana shares and raised the stock's price target to $400 from $385, reflecting confidence in Humana's ability to manage seasonal variations effectively. These are the recent developments concerning Humana.
InvestingPro Insights
Recent InvestingPro data provides additional context to Humana's current situation. Despite the challenges with its Medicare Advantage Star Ratings, Humana maintains a strong market position with a market capitalization of $33.65 billion. The company's revenue growth of 13.48% over the last twelve months as of Q2 2024 demonstrates its ability to expand its business even in the face of operational hurdles.
InvestingPro Tips highlight that Humana has raised its dividend for 7 consecutive years and has maintained dividend payments for 14 consecutive years, indicating a commitment to shareholder returns despite the current setback. This could be reassuring for investors concerned about the potential impact of lower Star Ratings on the company's financial stability.
Moreover, with a P/E ratio of 15.12 (adjusted for the last twelve months as of Q2 2024), Humana appears to be trading at a relatively modest valuation compared to its historical levels. This might suggest that the market has already priced in some of the negative news regarding the Star Ratings.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips that could provide deeper insights into Humana's financial health and market position.
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