Don’t Read Too Much Into Humana Inc’s (HUM) Lowered Medicare Rating

Despite a valiant effort to obscure the ugly reality, Humana Inc (NYSE:HUM) isn’t firing on all cylinders with its Medicare plans, and owners of HUM stock paid the price for it today.

Don't Read Too Much Into Humana Inc's (HUM) Lowered Medicare RatingAll told, Humana stock was down more than 6% on Wednesday when the company announced the Centers for Medicare and Medicaid Services lowered its rating on Humana’s Medicare offerings, disqualifying the company for bonuses and at the same time making its plans less marketable to consumers.

The health insurer tried to soften the blow by upping its full-year earnings guidance for HUM shares, but that news fell on deaf ears.

Humana’s Medicare Plans Lose Luster

The Centers for Medicare and Medicaid Services regularly update their ratings on Medicare Advantage plans offered by health insurers, by adding or subtracting stars. Five stars is a top score.

These ratings consider matters such as timeliness of service and customer appeals. In response to a recent audit of Humana’s Medicare service, the Centers for Medicare and Medicaid Services lowered its rating of Humana’s 2018 Medicare offering on several fronts.

The fallout from such a shift is neither perfectly nor immediately clear; fewer stars does not necessarily mean fewer enrollees or diminished revenue. But, inasmuch as providers of the top plans qualify for bonus compensation, Humana will forego at least some of the fiscal benefit of maintaining a high-quality plan.

To the extent the impact of the CMS’ ratings can be qualified, Humana reported a significant decline in the number of members participating in its four-star and five-star plans. As of the end of July, membership in the insurer’s best plans dropped from 2.15 million customers the last time the CMS took a look to only 1.17 million members now. As a portion of the company’s total Medicare customer base, four-star and five-star plan enrollment fell from 78% to 37%.

Beyond the recent shift and adverse impact on bonus aware potential, lower ratings make it difficult for Humana to add new enrollees.

Guidance Raised

Simultaneously with its response to the Centers for Medicare and Medicaid Services’ new plan ratings, Humana updated its full-year profit guidance. The company now expects to report an operating profit of $9.50 per share of HUM stock this year, and a Q3 profit of $3.1 per share. Analysts had been calling for $9.24 and $2.88 per share of Humana stock, respectively.

Humana explained of the upward revision in its press release:

“The increase in FY16 EPS guidance was primarily due to better-than-previously-projected performance in the company’s Medicare Advantage business (group and individual) and its Healthcare Services segment as well as in-line performance in the company’s individual commercial business.”

The insurer also noted that the CMS star ratings released today don’t reflect changes the company intends to make between now and then. Humana even went on to say the most recent round of star ratings for the 2018 bonus year “do not accurately reflect the company’s actual performance under the applicable Star measures.”

The market, however, isn’t as confident.

Bottom Line for HUM Stock

Humana is right in at least one regard … the forward-looking ratings are based on historical data that may no longer be applicable. It’s crystal clear where Humana needs to improve if it wishes to qualify for the Centers for Medicare and Medicaid Services’ bonus payments again after 2018, and the company is already working on those fixes.

It may hurt in the meantime, but today’s 6% dip from Humana stock may well be an adequate punishment for the misstep. No more necessarily needs to be doled out.

The much larger concern for owners of HUM is still the pending pairing with peer and rival Aetna Inc (NYSE:AET). That merger has already run into a wall of concerns voiced by the Department of Justice, and the matter is going to trial in early December. That decision is going to make the lowered CMS rating look fairly immaterial when it’s all said and done.

In other words, don’t read too much into today’s news. The impact looks like it’s already been fully factored in.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/lowered-humana-hum-medicare-plan-rating-isnt-game-changer/.

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