Dive Brief:
- Humana is convinced that it can grow both the size and profitability of its Medicare Advantage business in 2026, despite concerns that the insurer’s plans are too generous and could saddle the company with undesired costs.
- Executives said they’re confident in their plan pricing and design on a call to discuss Humana’s third quarter results Wednesday morning — though, they noted there are steps Humana can take to manage membership growth if it starts looking like it may get out of hand as open enrollment continues.
- Humana said it’s still on track to double pre-tax margins in the privatized Medicare plans next year compared to 2025. But that forecast excludes the impact of quality or “star” ratings. The number of Humana members in highly rated plans dropped for 2026, complicating its path to profit recovery during a difficult time for payers in government programs.
Dive Insight:
Humana reaffirmed its 2025 adjusted earnings guidance on Wednesday after posting solid third quarter results, suggesting executives are still certain in the company’s outlook even after raising it in July.
However, the Louisville, Kentucky-based payer now expects earnings to be lower on a GAAP basis this year, by about $1.50 a share. Humana’s stock, which has traded this year at its lowest levels since the early days of the coronavirus pandemic, dipped 5% in premarket trade after the guidance tweak.
The change is not due to any unexpected change in medical costs, which came in as the company expected across its businesses in the quarter. Instead, it’s likely a result of Humana electing to spend more this year to reinforce its operations and chase higher MA star ratings.
Humana originally expected to spend a “few hundred million dollars” on the business early this year, before adding another $100 million in the second quarter and another $150 million in the third quarter to that tranche.
The higher investments drove down Humana’s profit in the period. Humana posted net income of $195 million, down almost 60% year over year, on revenue of $32.6 billion, up 11% year over year.
Despite the profit drop, both earnings and revenue were above analyst expectations.
Humana’s third quarter results “generally look good,” commented Whit Mayo, an analyst with Leerink Partners, in a note Wednesday morning.
Humana has been relatively insulated from rising medical spending this year after reshoring its business coming into 2025.
The insurer, which brings in the lion’s share of its premiums from MA, was hit particularly hard by rising costs in the program last year. Humana overhauled its MA plans for 2025 as a result, including cutting benefits, charging higher premiums and exiting unprofitable plans and counties.
That strategy has largely paid off, with plan exits and benefit design changes “more than offset[ting] claims trend and the funding environment” in the third quarter, the company commented in a securities filing.
Humana’s insurance segment posted a medical loss ratio of 91.1% in the quarter, up from 90.6% same time last year but in line with analyst expectations. The MLR, a key marker of spending on patient care, would have come in much higher without the MA overhaul due to growth in Medicare and Medicare prescription drug plans, which tend to carry higher spending, the company said.
Two weeks into annual Medicare open enrollment, Humana feels it’s set up similarly well for 2026, executives said on the call.
New sales are at the high end of what the company expected, and more enrollees are choosing higher rated plans that come with lucrative bonuses for the payer.
Humana is also entering 2026 with more MA members than it previously thought. Humana originally expected to lose 500,000 MA members this year after slashing its plans to improve margins. But over the year, Humana has steadily increased its retention expectations, and now believes it will keep 75,000 more MA members onboard than before.
“While it’s early, we feel good about what we are seeing so far,” CEO Jim Rechtin said on the call.
Market watchers expect a bumpy Medicare enrollment period, as major insurers largely exited unprofitable plans, increased cost-sharing and cut benefits for next year to try and resuscitate margins.
Less so Humana. Though the company is offering plans in three fewer states and 194 fewer counties next year, it’s largely maintained the generosity of the benefits in its remaining plans.
That’s led some investors to worry Humana designed its plans too aggressively for growth — especially after Humana cut commissions to brokers for enrolling new members in select plans this fall, an indicator that enrollees were opting into lower margin plans.
But not all growth is bad, Humana executives argued Wednesday.
“We are confident in our pricing and we are pleased that we expect to return to growth,” Rechtin said.
Humana is prepared to take action to slow sales if it feels the volume risks impacting Humana’s margin recovery plan, operations or member experience. Those actions could include further decommissioning plans or changing its marketing strategy, according to David Dintenfass, Humana’s president of enterprise growth.
“Part of this question about ‘Is growth good, is it not,’ comes down to the margin of that growth,” Dintenfass said. “We are trying to get to a place where all of our products on the insurance side have a reasonable margin.”
And right now, Humana is pleased with the profitability of its plans, according to CFO Celeste Mellet.
“Based on all the work that we did going into [open enrollment] in terms of our product design and our channel mix, we are happy with the margin we’re seeing and expect it to be relatively consistent with our overall margin — although some will be above and some will be below,” Mellet said.
Still, a drop in valuable star ratings casts a pall on Humana’s optimistic vision for MA next year. Humana will have 20% of its MA members in plans rated at least 4 stars in 2026, down from 25% in 2025, which could set back profit recovery plans.
Analysts questioned on the call why Humana didn’t crosswalk MA members out of one major contract that houses the majority of its group membership that came in below 4 stars. That would insulate the company from the revenue loss its lower stars represent.
But that would be a short-term financial gain that could cause member attrition and risk longer term stars performance, according to Rechtin and Mellet. Instead, Humana plans to split the contract, called H5216, into a few smaller contracts over time so there’s less risk to the overall business if one underperforms.
In part due to higher investments, Humana said it is making progress overall on strengthening its stars. The company has seen improvement across the “vast majority” of metrics, according to Rechtin. The company aims to achieve top-quartile stars by the 2027 plan year.
Overall, Humana’s insurance segment posted $251 million in income from operations, down 8% year over year.
The company’s health services division CenterWell posted $305 million in income from operations, down 20% year over year despite healthy revenue growth. Humana attributed the income drop to higher operating expenses and the continued phase-in of a Medicare risk adjustment model much disparaged by value-based providers.
Revenue of $5.9 billion was up 17% year over year, thanks to growth in its pharmacy and primary care businesses — including CenterWell Primary Care’s patients increasing by almost 15% compared to the end of 2024. The business served 447,100 patients across 342 centers in the quarter.
Humana has been steadily focused on growing CenterWell to diversify away from government insurance programs and catch up with larger vertically integrated peers like UnitedHealth and CVS, including through M&A. In July, Humana agreed to buy Florida provider The Villages Health for $50 million.
Mellet said Humana remains open to similar deals.
“We see significant opportunities to take advantage of the current market dislocation and acquire attractive small to mid-sized provider businesses,” the CFO said.
