01:50 PM EDT, 10/03/2024 (MT Newswires) -- Humana's (HUM) 2026 financial results are likely to see a "significant headwind" from potentially losing its 2025 Medicare Advantage quality star ratings, BofA Securities said in a note e-mailed Thursday.

On Wednesday, Humana said that the number of members enrolled in 2025 Medicare Advantage plans with a quality rating of at least four stars is expected to plunge, likely impacting its 2026 revenue and bonus payments. The company said it has outstanding appeals regarding certain results released by the Centers for Medicare and Medicaid Services and has requested further information.

"We estimate this would be a (greater than) 3.5% revenue headwind to Medicare as a result of lost bonus payments, or $23 (per) share in 2026 before any offsets, which would almost eliminate 2026 earnings," BofA analyst Joanna Gajuk said in a note to clients. The brokerage slashed its 2026 per-share earnings outlook to $13 from $25, assuming Humana can offset almost 50% of the impact through capitation and benefit cuts.

BofA downgraded its rating on the company's stock to underperform from neutral and cut its price objective to $247 from $376.

Humana shares were down 2.6% in Thursday afternoon trade, following a nearly 12% slump in the previous session. Year-to-date, the stock has lost 47% in value.

A potential drop in star ratings is expected to push the recovery of margins further out, potentially affecting how seniors and brokers perceive the brand in the forthcoming open enrollment, according to BofA. Elevance Health ( ELV ) underwent an appeals process in 2023, emerging victorious. CVS Health ( CVS ) regained its star ratings after one year, though not through an appeal, while it's taking "multiple years" for Centene ( CNC ) to do the same, Gajuk wrote.

Humana may mitigate the impacts of potential bonus and rebate losses by lowering the amount of benefits offered and by managing costs, according to the note. However, it could be "harder" for the company to find more savings as fixing stars needs investment, Gajuk said.

Humana said Wednesday it expects the CMS to formally release details of the 2025 star ratings by Oct. 10.

"The timing of the recovery is far from guaranteed, particularly if the election results in a win for Democrats and (Medicare Advantage) plans are pressured as they are demonstrating here with lower stars," Gajuk wrote. With the potential star losses, Humana is on course to earn near-zero margins in Medicare Advantage through at least 2026. This puts the company at risk of losing market share to UnitedHealth Group ( UNH ) , the analyst said.

On Monday, Humana said it will release its third-quarter financial results Oct. 30.

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