Humana Inc (NYSE:HUM) stock fell 2.67% (As on October 3, 11:26:39 AM UTC-4, Source: Google Finance) after Stephens downgraded the company to Equal Weight from Overweight with a price target of $250, down from $400, after the company released an 8-K disclosing preliminary 2025 Medicare Advantage STAR results with only about 25% of its members being in 4+ STAR plans for plan year 2025, or payment year 2026, versus about 94% in the prior year. The company said enrollments in its top-rated Medicare insurance plans dropped sharply, casting a cloud over the company’s 2026 revenue and bonus payments. The sell-off wiped nearly $4 billion from the company’s market value after it said the quality rating of one of its plans, which accounts for nearly half of its Medicare Advantage (MA) memberships, fell to 3.5 down from 4.5 last year.

Based on preliminary 2025 MA star ratings data, the company estimates only a quarter of its members, or 1.6 million people, will remain enrolled in 2025 for its 4+ rating plans that cover Americans aged 65 years or older, compared with 94% in 2024. The star ratings, given by the Centers for Medicare and Medicaid Services (CMS), can sway enrollees’ choice of plan and determine government’s reimbursement levels. Humana believes the ratings cut was driven by a narrow miss on the higher industry thresholds, set by the CMS, on some measures. “This represents a worst-case scenario result,” said Stephens analyst Scott Fidel, who downgraded the stock to “equal weight” from “overweight”. Humana said “there may be potential errors” in the federal agency’s calculation of some results, and it was exploring all options to mitigate a hit from the ratings cut to its 2026 revenue.

Specifically, contract H5216, which represents about 45% of Humana’s total membership and more than 90% of its Group MA membership, is expected to see its rating drop from 4.5 STARs in 2024 to 3.5 STARs in 2025. Despite the company’s assertion that this will not affect the earnings outlook for 2024/2025, the analyst at Stephens expressed concerns over the increased risk this poses to Humana’s ability to achieve its target individual MA margins of “at least 3%” by 2027.

This anticipated reduction in STAR ratings could potentially put over $3 billion in revenue at risk for the year 2026, according to the analyst’s estimates. The downgrade reflects the heightened risk profile for Humana as a result of the preliminary STAR results, which are set to be publicly released on October 10, 2024.