Humana upgrades earnings outlook on Medicare growth

Humana revised its 2026 adjusted earnings forecast upward after reporting stronger-than-expected performance in prescription drug costs and early Medicare Advantage enrollment figures, even as member quality ratings and market exits posed challenges. The company’s third-quarter revenue increased by 26% to $41.16 billion, compared with $32.65 billion in the same period a year earlier. Net income, however, declined to $162 million from $195 million, reflecting persistent cost pressures.

CEO Jim Rechtin explained that the earnings adjustment stemmed from lower prescription drug expenses and stronger membership trends than projected. Humana reported GAAP diluted earnings of $1.33 per share, down from $1.62 a year earlier, while posting an adjusted loss of 70 cents per share—a contrast to the adjusted earnings of $3.24 per share in the same period last year.

For 2027, Humana anticipates Medicare Advantage enrollment growth, though at a slower rate than in 2026. This slower pace will reduce initial marketing and enrollment costs, which have previously strained margins. Executives stated that 2027 pricing for Medicare Advantage plans was set with profitability as the primary goal, though they acknowledged that lower CMS star ratings, critical for plan quality and bonus payments, will continue affecting financial outcomes. On its first-quarter earnings call in April, Humana said it was on track for 25% Medicare Advantage membership growth in 2026, driven by strong retention rates. Rechtin noted that the company was adjusting benefits to protect margins while preserving the coverage members valued most.

Star ratings show gradual but critical improvement

The benchmark for CMS bonuses was not met in 2026, as just two Humana plans received 4 stars. The ratings released last month for 2027, however, awarded six plans 4.5 stars and 12 plans received 4 stars, indicating gradual improvement. CMS provides bonuses to plans with ratings of 4 or more stars. Rechtin observed that better ratings in 2028 could provide a short-term financial lift, with some funds redirected to enhance member experience and clinical performance. The company plans to use these funds to improve clinical outcomes and member satisfaction, aligning with its goal of achieving top-quartile performance in star ratings.

Cost trends offer a positive outlook. CFO Celeste Mellet reported that inpatient admission rates and per-admission costs are decreasing, a trend that aligns with broader cost management efforts. While Medicare Part D drug expenses are projected to rise by 14% to 15% in 2027 due to new treatments, these increases were already incorporated into pricing. “We have priced that into our bids,” she said, referring to both Medicare Advantage plans with drug coverage and standalone Part D plans. Mellet also highlighted that cost trends for both new and existing members were performing better than expected, reinforcing the company’s financial outlook.

Payment lags and cost pressures persist

Executives pointed to higher use of care and said the proposed Medicare Advantage payment increase lagged medical cost growth.

Despite these challenges, Humana’s 2026 financial outlook improved significantly. Adjusted earnings guidance now targets at least $9.50 per share, up from at least $9, while GAAP earnings guidance rose to at least $15.09 per share. The insurance segment’s benefit ratio, measuring claims paid against premiums, fell to 93.7%, slightly below expectations but still strong. The company’s strategy moving forward centers on balancing expansion with cost management, including optimizing its benefit structure to align with top-quartile performance in star ratings.