JPMorgan has reiterated its Neutral rating on shares of Humana (NYSE: NYSE:HUM), maintaining a price target of $396.00. The firm addressed Humana's recent announcement regarding the expected decline in the number of its members enrolled in 4+ star-rated plans for 2025.
Humana anticipates a significant drop from 94% in 2024 to approximately 25% in 2025. The expected downgrade is primarily due to the H5216 contract, which holds about 45% of Humana's Medicare Advantage (MA) membership and is projected to fall to 3.5 stars from 4.5 stars.
The downgrade in star ratings has substantial implications for Humana's payments from the Centers for Medicare & Medicaid Services (CMS), and due to Humana's significant reliance on MA, the impact on the company's revenue could be more pronounced than on other managed care organizations (MCOs). Humana also indicated that this could increase the risk of not meeting its individual MA margin target of "at least 3%" by 2027.
Humana has stated that the data is preliminary and that it is currently working with CMS to appeal the process, suggesting there could be potential errors in CMS's calculation of certain parts of its results and industry threshold cut points. Despite the possibility of implementing cost-saving measures and focusing on higher-rated plans, these actions may not entirely counterbalance the negative effects of approximately 70% of MA membership moving out of 4+ star plans.
The firm conducted a sensitivity analysis on the potential impact of reduced payments on Humana, estimating a $10-$20 headwind to adjusted earnings per share (EPS) in 2026. This is due to the reduction in star ratings, which affects rebates and potentially lost quality bonus payments (QBP). The bonus applied to the benchmark rate is crucial for calculating rebates for plans that bid below the benchmark rate. Rebates are then reinvested to enhance member benefits or reduce member cost-sharing.
JPMorgan's analysis assumes a 5% headwind to the bid-benchmark rates for moving from 3.5 stars to 4.0 stars. Given that contracts like H5216 have moved from 4.5 stars to 3.5 stars, the financial impact could be more significant.
However, the firm expects Humana to implement some mitigation efforts to lessen the overall impact but does not anticipate complete mitigation. Humana is scheduled to host a call with sell-side analysts on Wednesday to discuss these issues further.
In other recent news, Humana saw a significant decrease in its Medicare Advantage Star Ratings for 2025, with only about 25% of its members enrolled in plans rated 4 stars and above, a substantial reduction from 94% in 2024.
The decline is largely attributed to Humana's contract H5216, which accounts for roughly 45% of Humana's Medicare Advantage membership and fell to a 3.5-star rating from a 4.5-star rating the previous year.
InvestingPro Insights
Recent InvestingPro data and tips offer additional context to Humana's current situation. The company's market capitalization stands at $28.03 billion, with a P/E ratio of 16.51, reflecting the market's current valuation of the stock in light of recent developments.
An InvestingPro Tip highlights that Humana is "trading near its 52-week low," which aligns with the stock's recent performance following the star rating news. This is further evidenced by the stark -42.62% one-year price total return. Despite these challenges, another InvestingPro Tip notes that Humana "has maintained dividend payments for 14 consecutive years," suggesting a commitment to shareholder returns even in difficult times.
The company's revenue growth of 13.48% over the last twelve months indicates that Humana has been expanding its business, which could potentially help offset some of the financial impacts of the star rating downgrades discussed in the article. However, with an EBITDA growth of -15.95% over the same period, it's clear that profitability has been under pressure.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips that could provide further insights into Humana's financial health and market position.
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