Humana confident in Medicare Advantage growth despite plan generosity hampering margin recovery

Diving brief:

• Humana is confident 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 impose unwanted costs on the company.
• Executives said they were confident in the pricing and design of their plan during a call to discuss Humana’s third-quarter results Wednesday morning — however, they noted that Humana can take steps to manage its membership growth if it begins to appear to be spiraling out of control as open enrollment continues.
• Humana said it is still on track to double the pretax margins of privatized Medicare plans next year compared to 2025. But that forecast excludes the impact of quality or “star” ratings. Humana’s membership in highly rated plans has declined for 2026, complicating its path to recouping benefits in a tough time for payers of government programs.

Dive overview:

Humana on Wednesday reaffirmed its 2025 adjusted earnings forecast after reporting strong third-quarter results, suggesting executives are still confident about the company’s outlook even after raising it in July.

However, the Louisville, Ky.-based payer now expects earnings to be lower this year on a GAAP basis, by about $1.50 per share. Humana stock, trading this year at its lowest level since the early days of the coronavirus pandemic, fell 5% in premarket trading after forecasts were adjusted.

This change was not due to an unexpected change in medical costs, which occurred as expected by the company across its operations during the quarter. Instead, it’s likely because Humana chose to spend more this year to strengthen its operations and pursue higher MA star ratings.

Humana initially expected to spend “a few hundred million dollars” on the company early this year, before adding another $100 million in the second quarter and another $150 million in the third quarter to that tranche.

Higher investments lowered Humana’s profits in the period. Humana reported net income of $195 million, down nearly 60% year-over-year, on revenue of $32.6 billion, up 11% year-over-year.

Despite the earnings decline, both earnings and revenue were better than analysts’ expectations.

Humana’s third-quarter results “look generally good,” Leerink Partners analyst Whit Mayo said in a note Wednesday morning.

Humana has been relatively sheltered from rising medical costs this year after relocating its operations by 2025.

The insurer, which derives most of its premiums from MA, was particularly hard hit by the program’s rising costs last year. As a result, Humana has overhauled its MA plans for 2025, including reducing benefits, charging higher premiums, and dropping unprofitable plans and counties.

This strategy has largely paid off, with plan exits and changes to benefit design “more than offsetting[ting] claims trend and funding environment” in the third quarter, the company commented in a securities filing.

Humana’s insurance segment posted a medical claims ratio of 91.1% in the quarter, up from 90.6% in the same period last year but in line with analysts’ expectations. MLR, a key marker of patient care spending, would have been much higher without the MA overhaul due to the growth of Medicare and Medicare prescription drug plans, which tend to have higher spending, the company said.

Two weeks into Medicare’s annual open enrollment, Humana believes it’s just as well set up 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 also enters 2026 with more MA members than it previously thought. Humana initially expected to lose 500,000 MA members this year after scaling back plans to improve margins. But over the year, Humana has steadily increased its retention expectations and now estimates it will keep 75,000 more MA members than before.

“While it’s early, we’re pleased with what we’re seeing so far,” CEO Jim Rechtin said on the call.

Market observers expect a turbulent Medicare enrollment period, as big insurers have largely abandoned unprofitable plans, increased cost sharing and reduced benefits for next year to try to resurrect margins.

Less Human. Although the company offers plans in three fewer states and 194 counties next year, it has largely maintained the generosity of benefits in its remaining plans.

That led some investors to worry that Humana had designed its plans too aggressively for growth — particularly after Humana cut commissions paid to brokers for enrolling new members in some plans this fall, an indicator that enrollees were opting for lower-margin plans.

But not all growth is bad, Humana executives argued Wednesday.

“We are confident in our pricing and we are happy to anticipate a return to growth,” Rechtin said.

Humana is prepared to take action to slow sales if it believes that volume may impact Humana’s margin recovery plan, operations, or member experience. These actions could include new decommissioning plans or a change in marketing strategy, according to David Dintenfass, president of corporate growth at Humana.

“Part of the question of whether growth is good or not comes down to the margin of that growth,” Dintenfass said. “We’re trying to get to a point where all of our products on the insurance side have a reasonable margin.”

And for now, Humana is satisfied with the profitability of its projects, according to financial director Céleste Mellet.

“Based on all the work we have done before [open enrollment] in terms of our product design and channel mix, we are happy with the margin we are seeing and we hope it will be relatively consistent with our overall margin, although some will be higher and some lower,” Mellet said.

Still, a drop in precious star counts casts a pall over 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, compared to 25% in 2025, which could delay profit recovery plans.

Analysts questioned on the call why Humana didn’t move MA members out of a major contract that houses the majority of its group members and was below 4 stars. This would protect the company from the loss of revenue that its lower stars represent.

But this would constitute a short-term financial gain that could lead to member attrition and compromise the stars’ performance in the longer term, according to Rechtin and Mellet. Instead, Humana plans to split the contract, called H5216, into a few smaller contracts over time to reduce risk to the entire company in the event of underperformance.

Partly thanks to higher investments, Humana said it is making progress overall in boosting its stars. The company saw improvement in the “vast majority” of metrics, according to Rechtin. The company aims to reach the top quartile by plan year 2027.

Overall, Humana’s insurance business reported operating income of $251 million, down 8% year over year.

The company’s health services division, CenterWell, reported operating income of $305 million, down 20% year over year despite healthy revenue growth. Humana attributed the revenue decline to higher operating expenses and the continued phasing in of a Medicare risk adjustment model much maligned by value-based providers.

Revenue of $5.9 billion increased 17% year over year, driven by growth in its pharmacy and primary care businesses, including CenterWell Primary Care’s patient growth by nearly 15% from the end of 2024. The company served 447,100 patients in 342 centers during the quarter.

Humana has consistently 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 mergers and acquisitions. 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 and mid-sized provider businesses,” the CFO said.