Humana plunges 4.3% on widening losses, Medicare ratings collapse
Health insurer faces $1-3bn hit to quality bonus payments as medical costs soar and Star Ratings tumble
Humana shares tumbled 4.3% in pre-market trading Wednesday after the health insurer reported a widening fourth-quarter loss and warned of a significant earnings decline in 2026, driven by surging medical costs and a dramatic collapse in its Medicare Advantage Star Ratings.
The Louisville-based company posted a GAAP net loss of $6.61 per share for the fourth quarter, substantially worse than the adjusted loss of $3.96 per share. Revenue of $32.64 billion beat analyst estimates by 1.7%, but the company's insurance segment benefit ratio—a key measure of medical costs relative to premiums—reached 93.1%, reflecting intense pressure from rising healthcare utilization.
More concerning for investors was Humana's 2026 guidance, which projects adjusted earnings of "at least $9.00 per share," well below the $12.00 consensus expectation. The primary culprit: a catastrophic decline in Medicare Star Ratings that will slash quality bonus payments by an estimated $1 billion to $3 billion in 2026.
The ratings collapse is severe. Only 25% of Humana's Medicare Advantage members will be in plans rated four stars or above for 2025, down from 94% in the prior year, according to Healthcare Dive. Medicare Advantage plans receive quality bonus payments from the Centers for Medicare & Medicaid Services (CMS) based on these ratings, making them a critical component of profitability.
Humana challenged the 2025 Star Ratings in court, but that lawsuit was rejected in October 2025. The company has appealed, but the financial uncertainty is weighing on shares as they trade near their 52-week low of $186.
The Star Ratings crisis compounds broader industry challenges. Medical cost trends have accelerated dramatically, with PwC projecting an 8% increase for 2025 following similar rises in 2023 and 2024. Humana's chief medical officer warned last February that the proposed 2.23% Medicare Advantage rate increase for 2026 would not fully account for these escalating costs, driven by higher hospital expenses, new therapeutics including GLP-1 weight loss drugs, and increased behavioral health spending.
Analysts have grown increasingly bearish. Morgan Stanley downgraded Humana to "Underweight" from "Equalweight" on February 2, cutting its price target to $174 from $262. Wells Fargo also downgraded the stock to "Equal-Weight" from "Overweight" in January. The consensus analyst rating is now "Hold," with 22 brokerages covering the stock split between 5 "sell," 9 "hold," and 8 "buy" ratings, according to MarketBeat data.
"The anticipated year-over-year decline in EPS is attributed to the 'Star Ratings headwind for Bonus Year 2026, net of mitigation,'" Humana stated in its earnings release.
Despite the near-term headwinds, management struck an optimistic note about growth prospects. Humana President and CEO Jim Rechtin said the company was "pleased with our solid financial performance and operational progress in 2025" and expressed confidence in "our consumer-focused strategy and individual Medicare Advantage membership growth in 2026."
The company expects approximately 25% growth in individual Medicare Advantage membership for 2026, driven by new sales and improved retention. CenterWell Senior Primary Care grew by 100,600 patients, or over 25%, in 2025, and the Medicaid footprint expanded to 13 states with Georgia and Texas expected to launch in 2027.
For the full year 2025, Humana reported GAAP earnings per share of $9.84 and adjusted EPS of $17.14, with the insurance segment benefit ratio coming in at 90.4%, slightly better than the guided range of 90.1% to 90.5%.
But the path forward remains fraught with challenges. Beyond the Star Ratings issue, CMS has proposed a minimal 0.09% net average year-over-year Medicare Advantage payment increase for 2027, significantly below the mid-single-digit increases insurers had anticipated. That policy uncertainty, combined with persistent medical cost inflation, suggests Humana's reset may extend beyond 2026.