On Wednesday, TD Cowen reaffirmed its Buy rating on Humana (NYSE:HUM) with a steady price target of $402.00. The firm addressed Humana's recent disclosure that only 25% of its current members will be in 4 Star and above plans in 2025, a significant drop from 94% in 2024. The decline includes contract H5216, which will see approximately 45% of its members' ratings fall from 4.5 to 3.5 stars.
The change in star ratings is expected to influence Humana's premiums in 2026. The company attributes the reduction to narrowly missing higher industry benchmarks on a few measures and is currently contesting some of the results. Star ratings are crucial as plans with 4.0+ stars receive a 5% quality bonus adjustment to benchmark rates, and those with 4.5+ stars get a 70% rebate, compared to a 65% rebate for plans rated between 3.5 and 4.0 stars.
The financial impact of these changes on Humana's earnings per share (EPS) and margins will depend on several factors. These include the degree to which Humana can mitigate premium losses by adjusting benefits, the all-in Medicare Advantage rate for 2026, the version 28 (v28) impact, the cost trend for 2026, and the effect on enrollment.
Plans experiencing a decline in star ratings have more leeway with the Centers for Medicare & Medicaid Services (CMS) total beneficiary cost reduction limits, which may allow them to preserve margins if they choose to do so.
TD Cowen highlighted an example of how changes in star ratings could affect plan premium revenue. While there are logical ways to offset the impact, unless Humana successfully appeals the rating declines with CMS, the lower ratings are anticipated to significantly affect the company's results in 2026. TD Cowen is currently reviewing its model and price target in light of these developments.
In other recent news, Humana is facing challenges due to the significant decrease in its Medicare Advantage Star Ratings for 2025. The company's contract H5216, which holds a substantial portion of Humana's Medicare Advantage membership, fell to a 3.5-star rating from a 4.5-star rating, causing a drop from 94% of its members enrolled in 4-star and above plans in 2024 to about 25% in 2025. Despite these recent developments, Barclays has maintained its Overweight rating and $364.00 price target on Humana.
On the other hand, Morgan Stanley and JPMorgan have both maintained their respective Equal-weight and Neutral ratings on Humana. However, Leerink Partners has downgraded Humana's stock from Outperform to Market Perform, citing the company's future performance concerns due to the lower star ratings.
In related news, Evolent Health (NYSE:EVH), a significant customer contributing to 21.8% of Evolent's second-quarter 2024 revenue, may be impacted by Humana's updates. Nevertheless, JPMorgan has maintained its Overweight rating and $45.00 price target for Evolent Health, indicating that the company's fees for managing specialty care in Medicare Advantage contracts are unlikely to be impacted.
InvestingPro Insights
In light of Humana's recent star rating challenges, InvestingPro data and tips offer additional context for investors. Despite the potential impact on future premiums, Humana's financial metrics show resilience. The company's revenue for the last twelve months as of Q2 2024 stands at $112.04 billion, with a solid revenue growth of 13.48% over the same period.
InvestingPro Tips highlight that Humana has maintained dividend payments for 14 consecutive years and has raised its dividend for 7 consecutive years, demonstrating a commitment to shareholder returns even in challenging times. This could be reassuring for investors concerned about the potential financial impact of the star rating changes.
The stock's recent performance aligns with the news of the star rating decline, as InvestingPro data shows a 20.95% price decline over the past month. However, with a P/E ratio of 17.41 and a price-to-book ratio of 2.02, Humana may be trading at attractive valuations for long-term investors who believe in the company's ability to navigate the current challenges.
For those seeking a more comprehensive analysis, InvestingPro offers 12 additional tips that could provide deeper insights into Humana'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.