Humana's Q3 2025: Contradictions Emerge on Stars Recovery, Investment Timing, and Medicaid Margin Projections

Business Commentary:

* Solid Third Quarter Performance: - Humana delivered a solid third quarter in line with expectations, with medical cost trends continuing to be consistent with forecasts. - The company anticipates maintaining their full-year 2025 EPS outlook of approximately $17.

• Membership and Product Strategy:
• Humana's Medicare product and experience are focusing on maximizing customer lifetime value and retention, with a notable decrease in plan-to-plan sales.

• The company expects to return to growth and reports new sales at the high end of the anticipated range in AEP.

• Stars Performance and Clinical Excellence:

  

• The company has seen improved performance in HEDIS and patient safety metrics, indicating progress towards returning to Top Quartile Stars results in Bonus Year '28.

• Early improvements in operating metrics and closeouts of gaps are positive indicators for future performance.

• Efficiency Improvements and Capital Allocation:

• Humana is realizing savings from outsourcing finance capabilities and implementing an agentic AI platform, expected to generate over $100 million in savings.

• The company is actively pursuing the sale of non-core assets and has sold the Enclara Pharmacia business, freeing up capital for strategic initiatives like the acquisition of the Villages Health.

• Focus on Long-Term Value and Customer Retention:

• Humana emphasizes long-term value and customer retention as strategic priorities, with an approach that balances short-term performance with long-term growth.
• The company aims to differentiate its experience to drive long-term customer value and retention, shifting from a focus on short-term growth to sustainable customer lifetime value.
  

Contradiction Point 1

Stars Performance and Recovery Efforts

It involves differing statements about the progress and expectations regarding Stars performance and recovery efforts, which are crucial for regulatory compliance and financial outcomes.

Could you elaborate on your Stars recovery efforts and which initiatives have demonstrated the most progress? - Benjamin Hendrix (RBC Capital Markets)

2025Q3: Operations are focused on HEDIS and patient safety metrics, showing strong progress. We are seeing meaningful year-over-year improvement across most metrics, which makes us confident in our trajectory. - James Rechtin(CEO)

Can you discuss how your Stars performed in the planned preview? - Justin Lake (Wolfe Research)

2025Q2: Data is not out yet, but we made operational progress and feel good about underlying metric performance. Once data is available, we will enter a quiet period until October. - James Rechtin(CEO)

Contradiction Point 2

Investment Strategy and Timing

It involves differing statements regarding the timing and focus of the company's investments, which are critical for strategic planning and financial forecasting.

How is the MA market growing, and what steps are you taking to mitigate risks during open enrollment? - Albert Rice (UBS Investment Bank)

2025Q3: We expect this to save us about $240 million in 2026, $120 million in 2027 and $60 million in 2028. - Celeste Mellet(CFO)

Can you provide an update on the path to achieving the 3% MA margin target? - Ben Hendrix (RBC Capital Markets)

2025Q1: There's still about $60 million over the next 3 years that we've got work to do. - Celeste Mellet(CFO)

Contradiction Point 3

Earnings Impact and Timing of Investments

It highlights differences in the reported impact of investments on earnings, which are important for financial forecasting and shareholder expectations.

What is your perspective on 2026 cost trends and the CenterWell Pharmacy opportunity? - Jason Cassorla (Guggenheim Securities)

2025Q3: Our guidance contemplates about $550 million of incremental investments in Stars in 2026, compared with $500 million in 2025. - Celeste Mellet(CFO)

How much of your Q1 investments shifted out of the quarter? Did it shift into Q2? Did Q1 performance meet expectations? - Sarah James (Cantor Fitzgerald)

2025Q1: This year, we're expecting $500 million, and at the most, in the mid to high 400s next year. - Celeste Mellet(CFO)

Contradiction Point 4

Stars Recovery and Operational Progress

It reflects differing levels of confidence and specific details regarding the company's Stars recovery efforts and operational progress, which are crucial for regulatory compliance and financial performance.

What progress has been made in your Stars recovery efforts and which initiatives have shown the most advancement? - Benjamin Hendrix (RBC Capital Markets)

2025Q3: We are seeing meaningful year-over-year improvement across most metrics, which makes us confident in our trajectory. - James Rechtin(CEO)

Do you have any updates on the timing for Stars? - Justin Lake (Wolfe Research)

2025Q1: I think operationally, we feel very good about the progress we've made. - James Rechtin(CEO)

Contradiction Point 5

Medicaid Margin Improvement

It involves differing expectations for Medicaid margin improvements, which are critical for diversifying revenue streams and maintaining profitability.

Can you update the percentage of MA members under fully capitated agreements and your plans for this segment? - Justin Lake (Wolfe Research)

2025Q3: We are taking actions to reduce benefits over the past two years. We are reducing Part D risk and implementing Stars mitigation programs. We are working with value-based partners to manage economic headwinds. - George Renaudin(CIO)

What is the Medicaid margin trajectory and expected improvements by 2025? - Scott Fidel (Stephens)

2024Q4: Medicaid is expected to grow with member additions, showing modest margin improvements. Maturity is key, with Florida already at expected margins. Rates are well known for 2025, with improvement ongoing. - George Renaudin(CIO)