Medicare Mess Sends Humana Shares on Worst Fall Since Financial Crisis

(Bloomberg) -- Humana Inc. investors haven’t struggled through anything this bad since the global financial crisis 15 years ago.

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The health insurer’s stock price plunged 22% on Tuesday and Wednesday alone, something it last did in February 2009. And they kept falling, with shares suffering their worst week since 2020 and putting them at a level last seen in March of that year.

It all started on Tuesday, when speculation rippled through the stock market that Humana was going to lose high quality ratings on some of the major plans it manages for the US Medicare program. By early Wednesday morning, a week before the government is due to release its official Medicare ratings, the company confirmed the rumors were true. As a result, only about a quarter of its members will be in highly rated plans that generate extra revenue, down from 94% previously, Humana said.

The news sent its shares into a tailspin, falling as much as 24% within the first five minutes of Wednesday’s trading, its biggest intraday decline since Feb. 23, 2009. At the peak of the selloff on Wednesday morning, Humana had lost a third of its market value in just two sessions. It regained some of that decline by the end of the day.

All in all, it was a “worst case scenario” come to fruition, according to UBS analyst AJ Rice.

Quality ratings, also referred to as “star ratings,” range from one to five and help to drive billions of dollars in revenue for Medicare Advantage insurers. More stars allow plans to receive lucrative government bonus payments, while fewer stars can make it harder to attract new customers.

For Humana, a reduced rating would be catastrophic since its business is primarily focused on Medicare. The future hit to profits could reach as much as $23 per share in 2026, “which would almost eliminate 2026 earnings,” according to Bank of America analysts led by Joanna Gajuk. It also could push the firm’s margin recovery further out, according to Gajuk, who has a sell-equivalent rating on the stock.

Wall Street responded to Humana’s confirmation of Medicare’s decision by slashing price targets on the stock, and at least four analysts downgraded their ratings on the shares. Still, the Street consensus is for them to hit $342 in the next 12 months, a 42% jump from current levels. And of the 27 analysts covering Humana, 10 have buy ratings, 15 have holds and only two have sells.