Humana's Medicare Advantage Stars Loss Assumed in Earnings Bridge: Morgan Stanley

Morgan Stanley analyst Erin Wright reiterated an Equal Weight rating and $290 price target on Humana after a court granted the Centers for Medicare and Medicaid Services’ motion to dismiss the case Humana brought against it. The firm noted that Humana's earnings bridge to 2028 already assumed Medicare Advantage Stars lawsuit loss and continued Stars challenges in 2027 before returning to top quartile Stars performance in 2028.

A Texas federal judge has dismissed Humana's lawsuit against the Centers for Medicare and Medicaid Services (CMS), seeking to improve its Medicare Advantage (MA) star ratings. The decision, handed down by District Judge Reed O’Connor, marks a significant setback for the insurer, which had argued that the agency acted arbitrarily and capriciously in downgrading its ratings. Humana’s stock fell by 3% on the news, highlighting the impact of the ruling on investor sentiment.

The lawsuit, filed in October 2024, challenged the CMS's administration of the MA and Part D Star Ratings program. Humana sought to reverse its quality scores, which are tied to billions of dollars in reimbursement. However, O’Connor ruled that Humana failed to exhaust administrative remedies before filing its lawsuit. The judge noted that Humana had not completed its appeal with the CMS before bringing the case to court.

The decision is a blow for Humana, which saw its average star score drop from 4.37 in 2024 to 3.63 for 2025—the largest drop among major MA insurers. As a result, only 25% of Humana’s MA members are now in a plan with four stars or above. The insurer wanted the judge to force the CMS to recalculate its ratings, but O’Connor dismissed the case without prejudice, allowing Humana to refile after completing the administrative appeals process.

Analysts estimate that Humana, the second-largest MA payer in the country, could lose $1 billion to $3 billion in 2026 due to the drop in star ratings. Despite the setback, Humana reaffirmed its 2025 profit forecast earlier this year and is working on a plan to improve margins, which relies in part on improving its star ratings. The insurer expects it won’t achieve the total points required for a four-star rating until the 2028 bonus year.

Morgan Stanley analyst Erin Wright reiterated an Equal Weight rating and $290 price target on Humana following the court's decision. The firm noted that Humana's earnings bridge to 2028 already assumed the Medicare Advantage Stars lawsuit loss and continued Stars challenges in 2027 before returning to top quartile Stars performance in 2028.

Shares of other health insurers also fell following the ruling. Humana's stock fell 2.8% to $217.34, CVS Health (CVS) dropped 1.4%, UnitedHealth Group (UNH) slipped 1%, Elevance Health (ELV) fell 5%, Molina Healthcare (MOH) dropped 4.6%, Centene (CNC) dipped 2%, and Cigna (CI) edged lower by 0.3%.

The decision underscores the importance of the Medicare Advantage Star Ratings program in determining the financial health of MA insurers. As the CMS continues to refine its rating system, insurers will need to adapt their strategies to navigate the changing landscape.

References:
[1] https://www.healthcaredive.com/news/humana-medicare-advantage-star-ratings-lawsuit-dismissed/753455/
[2] https://www.tradingview.com/news/reuters.com,2025:newsml_L4N3TF1DD:0-health-insurers-turn-red-after-judge-dismisses-humana-medicare-lawsuit/