Humana shares tumble 25% as investors weigh impact of CMS ratings

Humana (HUM) is facing significant financial and operational challenges due to a steep decline in its Medicare Advantage Star Ratings for 2025, as provided by preliminary data from the Centers for Medicare & Medicaid Services (CMS). Only 25% of its members are currently enrolled in plans rated 4 stars or above for 2025, a sharp drop from 94% in 2024. This reduction is largely attributed to the rating downgrade of its H5216 contract, which covers approximately 45% of its Medicare Advantage membership. The decline will directly impact Humana's quality bonus payments in 2026, raising concerns about its future financial outlook.

The CMS Star Ratings play a critical role in the financial health of Medicare Advantage insurers like Humana. Plans rated 4 stars or higher are eligible for significant quality bonus payments from CMS, which can improve profitability and allow for premium reductions or enhanced benefits. The loss of these ratings will likely lead to a reduction in revenue in 2026, and while Humana has stated that its 2024 and 2025 financial results won’t be affected, the looming 2026 revenue headwind could be substantial.

Humana has expressed disappointment in the preliminary ratings and has initiated several appeals, challenging what it believes are potential calculation errors by CMS. The company is seeking more information on how certain threshold cut points were determined. These efforts, while important, may not prevent a material impact on 2026 performance. If unsuccessful, Humana will need to explore other options to mitigate the financial fallout from the ratings downgrade, particularly in its Medicare Advantage business, which accounts for 65% of its EBITDA.

Looking further ahead, Humana’s initiatives to address its operational shortcomings and regain its industry-leading Stars performance are projected to improve its quality bonus payments starting in 2027. The company is focusing on improving member and provider engagement, enhancing customer experience, and strengthening technology integrations. These efforts are vital as Humana seeks to rebuild its Star Ratings and stabilize its Medicare Advantage business in the years to come.

The impact of CMS's ratings downgrade will be felt not just in 2026 but likely into 2027 as well. While Humana’s 2025 outlook is not expected to suffer immediately, the company’s ability to achieve its target of at least a 3% Medicare Advantage margin by 2027 is now at risk. The next few years will be crucial as the company works to restore its star ratings and mitigate the anticipated financial pressures.

The star ratings reduction also highlights broader industry challenges. Other major health insurers in the space, including UnitedHealth (UNH), Centene (CNC), Cigna (CI), and Elevance (ELV), could face similar pressures if CMS tightens its rating criteria or if companies fail to meet performance thresholds. Weaknesses in these competitors are being closely watched by the market as a bellwether for how Medicare Advantage providers will fare in a potentially tougher regulatory and financial environment.

The formal release of the 2025 CMS Star Ratings is expected on or around October 10. This date will mark a critical juncture for Humana and other insurers, as the market will react to the confirmed ratings and their implications for future financial performance. As the enrollment period for Medicare Advantage plans runs from October 15 to December 7, these ratings will be a key consideration for beneficiaries making coverage decisions, potentially impacting market share for affected insurers.

The anticipated financial impact extends beyond just 2026 and 2027. With the rising cost of medical care, driven in part by delayed procedures from the COVID-19 pandemic, insurers like Humana are already facing pressure from elevated medical expenses. Combined with weaker star ratings, this could lead to shrinking margins and reduced profitability over the long term unless Humana's strategic initiatives yield substantial results.

Overall, the CMS star ratings carry profound implications for Humana’s future revenue and earnings trajectory. With Medicare Advantage being its core business, the company’s immediate focus will be on correcting course while preparing for potential headwinds in 2026.