Diving briefs:
- A federal judge dismissed a lawsuit from Humana against the federal government aimed at improving its Medicare Advantage Star rating, marking a significant setback for insurance companies.
- Humana had sued CMS in October 2024, seeking to reverse the quality score and argued that the agency had acted arbitrarily to downgrade the rating in 2025, which was associated with a multi-billion dollar rebate.
- However, District Judge Reed O’Connor ruled that Humana had not exhausted its administrative options before pursuing legal action. Humana is now considering further legal steps.
Dive Insights:
O’Connor’s ruling resulted in a 3% drop in Humana’s stock on Friday morning, depending on the timing of the case.
Humana initiated legal action before awaiting the outcome of an appeal with CMS, which indicated to the court that Humana had declined to appeal in April, six months after the original complaint was filed in the Northern District of Texas.
Consequently, O’Connor concluded that “the plaintiff’s federal lawsuit was premature and was dismissed without prejudice,” as stated in his July 18 ruling.
This decision struck a significant blow to the Kentucky-based insurer, which had anticipated a resolution for several months following the incident. Many within the company are frustrated with the star rating. Humana initially requested a decision from O’Connor by December of last year to allow adjustments to bids for the 2026 contract year.
Humana criticized CMS for their inconsistent application of the thresholds necessary for achieving each star level and claimed that the rating was unfairly influenced by three erroneous customer service calls.
The insurer sought court intervention to compel CMS to reevaluate its ratings after the average star score dropped from 4.37 in 2024 to 3.63 in 2025. Consequently, only 25% of Humana’s MA members have plans rated above four stars this year.
This decrease is significant, as star ratings intended to reflect the quality and effectiveness of plans are closely tied to refunds for privatized Medicare plans.
Analysts project that Humana, the second-largest MA provider in the U.S., may face losses ranging from $1 billion to $3 billion in 2026 as a result of this downturn.
A Humana spokesperson stated that the company is evaluating the court’s decision and could pursue further legal action.
“The ruling indicates that the court lacks the authority to hear the case, given that Humana had not completed its administrative appeal process by the time of filing, although it has since done so,” the spokesperson noted.
Humana has been notably affected by rising operational costs for its members, which have eclipsed their refunds. Confidence in the company’s profit projections has dimmed amid changing policies and increasing scrutiny regarding the conduct within MA programs.
Earlier this year, Humana reaffirmed its profit outlook for 2025, and even with some acknowledging a trend toward challenges, the company has not altered its guidance. This was prior to the lawsuit’s outcome, which could significantly influence Humana’s financial future.
“Setting aside the star ratings, we feel positive about our fundamental business progress. However, it’s crucial to align that with the uncertain star outcomes,” CEO Jim Retchin mentioned in April.
On Investor Day in June, Humana executives revealed they had submitted an MA bid for 2026, operating under the assumption that they would not win the lawsuit. Insurance companies are currently strategizing to enhance margins and are partially counting on improvements in star ratings.
Humana anticipates that achieving the total points necessary for a four-star rating won’t be possible until the 2028 bonus year.
