(Bloomberg) — As health insurers have faced one disaster after another this year, Humana Inc. It has lost half of its market value. After another big pullback on Wednesday, investors are getting impatient.
Most Read from Bloomberg
The latest glitch focuses on critical quality assessments that generate billions of dollars in revenue. After the Centers for Medicare and Medicaid Services downgraded Humana, only about 25% of its members will be in higher-rated plans that generate additional revenue, compared with 94% previously.
Humana shares fell as much as 24%, before paring the biggest decline in 15 years.
Stephens analyst Scott Fidell called the news a “worst-case scenario” for Humana and estimated that $3 billion in revenue could be at risk. Leerink analysts led by Whit Mayo estimated that the lower valuations would cost the company $1 billion in 2026 and delay Humana’s plans to achieve a target of at least 3% of its Medicare Advantage business by 2027.
Humana is the only major US health insurer that focuses almost exclusively on medical insurance. It’s tied more tightly to the program’s fate than most of its diversified competitors — which has recently turned upside down. Health care costs and lower payments from the government have caused the surprise to shave nearly $30 billion from the company’s market value by 2024.
Soon after, the company appeals to CMS, which sets the ratings. It’s unclear how long this could take, but the rate cut won’t take effect until 2026, with a ratings hit. Other insurance companies have successfully challenged such rulings in the past, restoring favorable ratings before they hurt earnings.
Either way, new CEO Jim Regdin faces a year-long road to restoring the insurer’s earnings and regaining investor confidence. Rectin took over in July from Bruce Broussard, who spent more than a decade tripling Humana’s Medicare Advantage business and presiding over a 400% gain in the company’s stock price.
Humana plans to hold private calls with investors Wednesday afternoon, a spokeswoman said.
Humana’s market value could revive takeover interest from Cigna Group, especially if a second Trump administration brings in lighter antitrust regulations. Cigna is divesting its own smaller health insurance business.
Mizuho’s Jared Holz said on Wednesday that investors were speculating whether Cigna would take another approach, “but doubt a move will happen until a little more dust settles.”
The ratings, also known as stars, evaluate the quality of care and customer service for private health insurance plans, which now cover more than half of all people in the U.S. plan. It’s a high-stakes calculation that could drive $11.8 billion in bonus payments to insurers this year, including $2.5 billion to Humana, according to health policy research group KFF.
Humana said it was “disappointed in its performance and efforts are underway to focus on improving its operating discipline and returning to industry-leading star status as quickly as possible.” The ratings do not affect the company’s financial outlook for 2024 or 2025, the company said.
Medicare reviews plans each year ahead of the enrollment window that begins on October 15th. So far there are few signs that any of Humana’s competitors have taken such a big hit in their ratings.
Although official rating files are not published, some can be found in Medicare’s Plan Finder tool, which helps consumers shop for coverage. Two of CVS Health Corp.’s biggest plans appeared to retain 4-star ratings on the website, Evercore ISI analysts said in a note Wednesday. CVS shares rose as much as 3.9% in New York.
–With help from Angel Adekbeson.
Most read from Bloomberg Businessweek
©2024 Bloomberg LP
2024-10-02 23:07:32