Humana's stock extends losses as BofA downgrades to sell on concerns about a margin recovery

By Ciara Linnane

The health insurer has lost 24% in the week to data after it said the government is set to cut the rating on a large Medicare Advantage plan

Humana Inc.'s stock slid another 2.5% Thursday to bring its week-to-date losses to 24.4%, after BofA Securities downgraded it to underperform - or sell - on concerns about a delay in margin recovery.

The move comes a day after the health insurer (HUM) said one its key Medicare Advantage plans looks set to have its government rating cut, which would reduce reimbursement rates. The stock sold off Wednesday on the news and led S&P 500 SPX decliners.

The Centers for Medicare and Medicaid Services is set to cut the 2025 star rating on Humana's H5216 plan, which contains 45% of Humana's Medicare Advantage members. As Mizuho analyst Ann Hynes explained on Wednesday, if the rating cut is officially announced on or about Oct. 10, it would "significantly impact 2026 rebates and quality payments from the government."

BofA analysts Joanna Gajuk and Adam Ron said Thursday they expect the loss to be a $23-a-share headwind for Humana in 2026 before any offsets, "which would almost eliminate 2026 earnings."

"While the loss of stars does not directly impact 2024-2025 results, it pushes the recovery of margins further out and could impact how seniors and brokers perceive the brand in the coming open enrollment," they wrote in a note to clients.

Humana is planning to work on regaining the rating and has an appeal pending, which could be resolved by as early as Oct. 10, "but there's risk the full recovery might take longer than expected," the BofA analysts wrote.

BofA lowered its 2026 per-share earnings estimate for Humana to $13 from $25 previously, which it said is based on the assumption the company will offset about half the impact through capitation and benefit cuts.

The analysts lowered their price target more than 34%, to $248 from $376.

BofA highlighted that it took CVS Health Corp. (CVS) a year to regain its star rating - not through appeal - while it is taking multiple years for Centene Corp. (CNC) to achieve the same thing.

Given that the timing of recovery is not guaranteed, and that a Democratic victory in November's election could lead to more pressure on Medicare Advantage star ratings, Humana could lose market share to UnitedHealth Group Inc. (UNH), the analysts said.

The stock is now down 47% in the year to date, while the S&P 500 has gained 19%.

-Ciara Linnane

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10-03-24 1355ET

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