Humana's 2026 Earnings Forecast Sparks Concerns in Medicare Advantage Market
This week, Humana Inc. (NYSE: HUM) made waves in the managed care sector by issuing a 2026 earnings forecast that fell significantly short of Wall Street's projections. Despite surpassing expectations in its fourth-quarter 2025 earnings announced on February 11, Humana warned that its adjusted earnings per share for 2026 would hit "at least $9.00," notably below the $12.00 analysts had predicted.
The downgrade is primarily driven by a $3.5 billion financial setback linked to a decline in Medicare Advantage (MA) Star Ratings, which directly impact the quality bonus payments insurers receive from the federal government. This announcement led to a 5% drop in Humana’s stock, as investors reevaluated the company’s potential for margin recovery, which now appears more challenging than previously expected.
Star Ratings and Financial Strategy
The discrepancy between Humana's 2025 performance and its 2026 outlook highlights the delayed financial impact of the Star Ratings system administered by the Centers for Medicare & Medicaid Services (CMS). Humana’s Q4 2025 results showed an adjusted loss of $3.96 per share, slightly better than the $4.00 loss anticipated by analysts, with revenue reaching $32.52 billion. For 2025, Humana achieved an adjusted EPS of $17.14, surpassing its forecasts.
However, the 2026 projection reveals the significant impact of the "Star Ratings cliff." In 2024, a substantial 94% of Humana’s members were enrolled in 4-star or higher-rated plans, which dropped to just 25% for the 2025 ratings due to narrowly missing quality metrics and stricter CMS rating thresholds. Despite management's "contract diversification" efforts to elevate the number of members in higher-rated plans to about 45% for 2026, the financial setback from reduced quality bonuses is severe, overshadowing membership expansion and operational efficiencies.
Industry Challenges and Strategic Responses
Other insurers also face similar regulatory compliance challenges, with varied success. UnitedHealth Group (NYSE: UNH) has kept 78% of its members in higher-rated plans for 2026, although it plans to prioritize margins over membership, potentially losing over 1.3 million members to maintain profitability. CVS Health (NYSE: CVS), through its Aetna division, reports 81% of its members will be in higher-rated plans for the 2026 payment year, positioning CVS to potentially gain market share as Humana weighs benefit reductions or market exits to control losses.
Humana's situation is indicative of broader industry adjustments. For years, the Medicare Advantage market has been a key profit driver for insurers, buoyed by favorable federal reimbursements and an aging population. Recent CMS adjustments, including "V29" risk changes and stringent Star Ratings, aim to curb government expenditures but impose financial strain on private insurers amidst increasing healthcare utilization among seniors.
Future Outlook in a Shifting Landscape
The focus in Medicare Advantage is shifting from growth-centric to quality-centric. Insurers must excel in Star Ratings to remain viable under CMS guidelines, possibly resulting in more concentrated markets and fewer plan options for seniors. In the near term, Humana faces a challenging 2026, anticipating restructuring its offerings, possibly leading to higher member premiums or reduced benefits.
Looking forward, Humana's management is concentrating on the 2027 and 2028 payment years, aiming to return to 4-star performance levels. This strategic pivot requires precise execution in clinical documentation and member satisfaction to recover forfeited federal bonuses. The current narrative has shifted from outlining Humana's recovery timeline to reassessing the attractiveness of the Medicare Advantage model for insurers.
In conclusion, Humana's 2026 outlook underscores the inherent regulatory risks in the healthcare industry. Although the Q4 2025 earnings provided temporary optimism, the $9.00 EPS forecast unveiled the significant disparity between analyst expectations and the real impact of Star Ratings. Moving forward, critical factors include Humana's ability to retain members amid benefit cuts and potential regulatory interventions by CMS to prevent large-scale insurer withdrawals from the MA marketplace. Industry participants must brace for a period of lower margins and increased regulatory scrutiny.