On Wednesday, Stephens adjusted its stance on Humana Inc . (NYSE:HUM) shares, downgrading the stock from Overweight to Equal Weight and slashing its price target to $250 from the previous $400. The revision followed Humana's release of a preliminary report indicating a significant decline in Medicare Advantage (MA) STAR ratings for 2025.
The company, in an 8-K filing, disclosed that for the plan year 2025, only about 25% of its members, equating to roughly 1.6 million individuals, are projected to be in plans with 4 or more STARs. This is a stark contrast to the previous year, where approximately 94% of members were in such high-rated plans. The downgrade in ratings was attributed to Humana narrowly missing the higher industry cut points on certain measures.
Specifically, contract H5216, which represents about 45% of Humana's total membership and more than 90% of its Group MA membership, is expected to see its rating drop from 4.5 STARs in 2024 to 3.5 STARs in 2025. Despite the company's assertion that this will not affect the earnings outlook for 2024/2025, the analyst at Stephens expressed concerns over the increased risk this poses to Humana's ability to achieve its target individual MA margins of "at least 3%" by 2027.
This anticipated reduction in STAR ratings could potentially put over $3 billion in revenue at risk for the year 2026, according to the analyst's estimates. The downgrade reflects the heightened risk profile for Humana as a result of the preliminary STAR results, which are set to be publicly released on October 10, 2024.
In other recent news, Humana Inc. faces a significant decrease in its Medicare Advantage Star Ratings for 2025. The reduction is largely attributed to Humana's contract H5216, which makes up about 45% of the company's Medicare Advantage membership, and fell to a 3.5-star rating from a 4.5-star rating. As a result, only 25% of Humana's members are enrolled in plans rated 4 stars and above for 2025, a stark decrease from the 94% in the previous year.
Mizuho and Barclays have raised concerns about the financial implications of these lower ratings on Humana's future earnings. Barclays suggests that a 10% reduction in bonus members could lead to a decrease of about $2.50 in earnings per share (EPS).
Despite these challenges, Humana reported strong growth in its Medicare business in the second quarter of 2024, surpassing expectations and raising its revenue guidance by $3 billion, primarily due to membership growth. The company is also actively implementing initiatives to improve operational discipline and enhance member and provider engagement, while exploring options to mitigate the anticipated revenue shortfall related to the 2025 Star ratings.
These recent developments highlight the ongoing challenges and strategic responses of Humana in the face of changing industry ratings and financial projections.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Humana's current situation. The company's stock has taken a significant hit, with a 20.95% decline in the past month and a 42.62% drop over the last year. This aligns with the recent downgrade and concerns over the company's Medicare Advantage STAR ratings.
Despite these challenges, Humana maintains a strong financial position. The company's revenue for the last twelve months as of Q2 2024 stood at $112.04 billion, with a 13.48% growth rate. An InvestingPro Tip highlights that Humana holds more cash than debt on its balance sheet, which could provide some financial flexibility as it navigates the potential revenue risks associated with the STAR rating changes.
Another InvestingPro Tip notes that Humana has raised its dividend for 7 consecutive years, demonstrating a commitment to shareholder returns despite market challenges. This could be a positive sign for investors looking for stability in uncertain times.
For readers interested in a more comprehensive analysis, InvestingPro offers 10 additional tips for Humana, providing a deeper understanding of the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.