Humana Reports Strong First Quarter Earnings as Medicare Advantage Costs Hit the Mark

Humana Inc. (NYSE:HUM) delivered a resilient first-quarter 2025 performance, defying expectations as its Medicare Advantage (MA) business posted better-than-anticipated cost controls despite a strategic retreat from unprofitable markets. The insurer reported an adjusted EPS of $11.58, surpassing analyst estimates of $9.95, while revenue rose to $32.1 billion, marking an 8.4% year-over-year increase. Shares surged 7.57% in extended trading following the earnings release, reflecting investor optimism about the company’s ability to navigate industry-wide MA cost pressures.

Medicare Advantage Membership Decline: A Strategic Trade-Off

Humana intentionally reduced its MA membership by 10% in 2025, shedding 550,000 members from unprofitable plans and 13 geographic markets. This exit strategy, while shrinking revenue streams, prioritized long-term profitability by focusing on higher-margin segments. CEO Jim Rechtin emphasized the move as a necessary trade-off: “We are confident in the growth outlook for value-based care and Medicare Advantage,” he stated, underscoring the company’s commitment to sustainable membership.

The reduction in MA enrollment, however, comes with risks. A projected decline in Medicare Advantage plans rated 4-star or higher could reduce future quality bonus payments from CMS. To counter this, Humana filed a lawsuit challenging CMS’s 2025 Star Ratings methodology, arguing it unfairly penalized the company.

Financial Resilience Amid Cost Pressures

Humana’s Q1 results highlight operational discipline:
- The Insurance segment’s benefit ratio (medical costs as a percentage of premiums) improved to 87.4%, down from 89.3% in Q1 2024, signaling effective cost management.
- GAAP net income rose to $1.24 billion ($10.30 per share), up from $741 million ($6.11) in the prior year.
- CenterWell, Humana’s primary care and pharmacy unit, contributed $5.1 billion in revenue, a 6% year-over-year increase, reflecting growth in senior-focused services.

The company reaffirmed its 2025 adjusted EPS guidance of $16.25, though GAAP EPS was trimmed to $14.68 due to non-operational adjustments. Analysts at Zacks Equity Research noted that premium revenue growth could offset membership declines, supporting an earnings beat in subsequent quarters.

Strategic Growth Initiatives

While Humana scales back in MA, it is expanding in complementary markets:
- Medicaid and D-SNP programs: The insurer secured a new contract in Illinois to manage a Fully Integrated Dual Eligible Special Needs Plan (D-SNP), targeting members eligible for both Medicare and Medicaid.
- Pharmacy services: CenterWell Pharmacy was selected as the fulfillment partner for NovoCare® Pharmacy’s weight loss medication for cash-paying customers, diversifying its revenue streams.

Challenges Ahead

Despite the Q1 success, Humana faces ongoing headwinds:
1. Star Ratings Litigation: The decline in high-rated MA plans threatens future quality bonuses, which accounted for ~2.5% of MA revenue in 2024.
2. Medical Cost Volatility: Post-pandemic elective procedures (e.g., orthopedic surgeries) and CMS reimbursement rate adjustments continue to pressure margins.
3. Regulatory Uncertainty: The proposed 2026 MA rate notice may stabilize reimbursements, but federal policy shifts could disrupt profitability.

Analyst and Market Sentiment

Investors responded positively to the earnings beat, with shares rising to $278.50 in after-hours trading. However, bearish sentiment on Stocktwits surged, with message volume spiking 1,650% ahead of the report, reflecting lingering concerns about MA’s profitability.

Conclusion: A Hold with Strategic Upside

Humana’s Q1 results demonstrate its ability to balance short-term membership declines with long-term cost discipline. The adjusted EPS beat and improved benefit ratio suggest the company’s exit strategy is working, while growth in Medicaid and CenterWell provides a buffer against MA headwinds.

Investors should consider:
- Strengths: Robust premium revenue growth, operational efficiency, and diversification into high-margin segments.
- Risks: Ongoing Star Ratings litigation, CMS reimbursement pressures, and macroeconomic uncertainty.

While Humana remains a Hold, its valuation—trading at ~16x 2025 adjusted EPS—appears reasonable given its defensive positioning in healthcare. The stock could outperform if the CMS rate notice stabilizes MA reimbursements and Star Ratings disputes are resolved favorably. For now, Humana’s Q1 results justify cautious optimism for long-term investors.

Final Note: Monitor CMS’s final 2026 MA rate notice and Star Ratings outcomes for further clarity on Humana’s trajectory.