Humana's (HUM.US) full-year guidance misses expectations due to the quality improvement plan's impact on profits.

Humana (HUM.US) has reported a lower-than-expected 2025 profit guidance, citing that it will invest heavily to improve the quality of its Medicare Advantage (MA) plans after being recently downgraded by the government.

As a company that relies heavily on MA plan revenue, Humana's business in this area is larger than its peers. Medicare Advantage is a government-provided health insurance plan designed to provide more comprehensive medical coverage for seniors. It is an alternative to traditional Medicare (the federal health insurance program) and is managed and operated by private insurance companies (such as Humana, UnitedHealth (UNH.US) and others).

Investors expressed concerns about the company's long-term performance due to the government's downgrade of its quality rating (star rating - a measure of the quality of the various insurance plans included in MA). This will affect the future Medicare payments to the company.

The company said in a statement on Tuesday that it expects adjusted earnings per share of at least $16.25 in 2025, lower than analysts' expectations of $16.78. In the fourth quarter, Humana reported an adjusted loss per share of $2.16, in line with analysts' expectations.

Despite the lower profit forecast, Humana's stock rose more than 2% before the US market opened on Tuesday. The stock has fallen 5.2% this year as of Monday's close.

Humana, UnitedHealth, and other insurers have rapidly expanded enrollment in private health insurance plans in recent years. According to the non-profit health policy and data analysis organization KFF, slightly more than half of Medicare enrollees in 2023 chose MA plans, more than double the percentage in 2010.

However, investors had to adjust their earnings expectations for Humana due to changes in market trends. The company withdrew its 2025 profit forecast at the time last year for similar reasons. It also issued a lower-than-expected profit forecast for 2024 due to rising patient care costs, which led to a significant drop in its stock price.

At the same time, government regulators have stepped up scrutiny of billing practices in MA plans, alleging that private insurers inflate the severity of patients' illnesses and the cost of their care.

Humana and other insurers filed a joint lawsuit against the government last year over the star rating decision. The government recently dropped its appeal of a case against UnitedHealth, the largest health insurer in the US, while Humana's lawsuit is still ongoing.