Health insurer Humana Inc (HUM.N) on Wednesday said a U.S. government health department cut its quality rating on Humana Medicare plans that currently enroll more than 1 million people, which could affect how much the government pays the insurer in 2018.
Humana said it disagreed with the new quality ratings and that it will ask the government to reconsider its assessment. It also said it would take operational actions to mitigate the financial impact of the ratings drop.
The cut could mean at least a $1 billion revenue hole for 2018, JP Morgan analyst Gary Taylor wrote in a research note. He suggested that Humana could cut some benefits and move other enrollees to higher performing plans to protect profits, but that it would be difficult to cover all of the gap.
Shares of Humana, whose plan to be bought by larger rival Aetna Inc (AET.N) is being challenged by the U.S. Justice Department in court, fell 5.8 percent, or $10.34, to $167.19. Aetna dropped $2.02, or 1.8 percent, to $110.05.
Humana said the government's updated "Star" ratings, published on Wednesday, show the number of its members in 4-star plans fell to 1.17 million from 2.15 million.
The government reimburses insurers more for 4-star rated Medicare plans than it does for lower-rated plans.
The change in ratings would affect these payments in 2018, but is not expected to impact membership growth in 2017, Humana said.
Humana raised its 2016 earnings forecast, citing better-than-projected performance in its Medicare Advantage business.
Humana now anticipates earnings of about $8.80 per share on a GAAP basis and about $9.50 on an adjusted basis for the year ending Dec. 31, or $0.25 per share above its previous guidance.
Medicare uses a Star rating system to measure how well Medicare Advantage and prescription drug plans perform. Medicare scores are based on several categories including quality of care and customer service. Ratings range from 1 to 5 stars, with five being the highest and one being the lowest score.
(This version of the story corrects to 1.17 million, not 1.7 million, in fifth paragraph)
(Reporting by Ankur Banerjee in Bengaluru and Caroline Humer in New York; Editing by Chris Reese, Bernard Orr)