Humana Drops After Ratings for Its Medicare Plans Decline

  • Membership in plans rated 4 stars and higher fell in July
  • Humana down 5.1%; Aetna, set to buy Humana, also falls

Humana Inc., the health insurer planning to merge with Aetna Inc., fell the most in more than three months after seeing a sharp decline in government ratings of plans it offers under Medicare.

The percentage of Humana’s membership in plans rated four stars or higher dropped to about 37 percent, or 1.17 million members, in July from 78 percent, or 2.15 million, a year earlier, according to ratings published by the Centers for Medicare and Medicaid Services, or CMS, on Wednesday. The decline is mainly due to lower scores as a result of a recent CMS audit, Humana said in a statement.

The shares dropped 5.1 percent to $168.44 at the close of trading in New York. Aetna fell 1.5 percent to $110.37.

The CMS revision is a “substantial negative,” Chris Rigg, an analyst with Susquehanna Financial Group who rates Humana’s stock neutral, said in a note. “If Humana cannot successfully mitigate the issue with CMS, it will be at a material enrollment disadvantage relative to its peers.”

The five-star rating system evaluates plans under Medicare Advantage, a privatized version of Medicare, and Part D, the government drug program for the elderly. The measure is used to determine whether carriers will receive bonus payments or rebates for their members, with the higher-rated plans getting the bigger bonuses. The lower Medicare quality scores are used for 2018 payments and could hurt Humana’s results for that year. The health insurer said it will file for reconsideration of the CMS ratings.

Peter Costa, an analyst at Wells Fargo Securities who recommends buying Humana, estimates the impact on 2018 earnings could be about $500 million, if the company makes no adjustments.

Cigna Corp. said Thursday in a filing that 20 percent of its Medicare Advantage customers are in plans rated four stars or higher. The company had about 67 percent of membership in such plans last year, Wells Fargo’s Costa said in his note, citing CMS data. Cigna said in the filing that it will work with CMS to review the ratings. The shares fell 2.4 percent to $121.96.

Raised Forecast

Humana also raised its profit forecast for the year. The Louisville, Kentucky-based company now anticipates 2016 earnings per share of about $9.50, excluding some items, about 25 cents higher than it previously expected. Analysts predicted $9.30, the average of estimates compiled by Bloomberg.

Humana’s drop was its biggest since July 7, when the stock plunged over concerns that its deal with Aetna might not get antitrust approval. The Justice Department has since filed a lawsuit to block the $37 billion transaction, as well as the separate $48 billion merger of Cigna and Anthem Inc., contending that both combinations would harm competition and undermine choice for consumers.

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