Humana says it plans to fight the Obama administration over a large reduction in the ratings of its 4-star Medicare Advantage plans for coverage starting in 2018.
Star ratings are a key quality measure under Medicare, and lower ratings could result in reduced reimbursement rates for Humana.
"Not having 4-stars on a significant portion of your plans will hurt you financially because you will not be able to achieve the bonus reimbursement that higher rated plans receive," said Deep Banerjee, a health insurance credit rating analyst and director at Standard & Poor's.
More than half of Humana's Medicare plans will lose their 4-star rating in 2018 under new rankings released by the Centers for Medicare and Medicaid Services. As a result, the company's membership in those higher-rated plans will fall to just 37 percent, from 78 percent this year.
The news sent shares down more than 5 percent, despite the fact that the health insurer raised its current guidance for 2016 earnings from $8.50 per share to $9.50 per share.
In a press release, Humana said, "The company believes that the decline is primarily attributable to the impact of lower scores for certain Stars measures as a result of the company's recently-closed comprehensive program audit by CMS."
The company said issues resulting in reduced stars included delays in resolving enrollee complaints over claims, but said it believes the reductions "do not fully reflect the company's focus on quality care for its members."
"Clearly Humana is going to fight this," said analyst Tom Carroll, a managing director at Stifel. He expects it's too early to determine what the real impact of the star rating reduction could be on Humana's earnings in 2018.
"They have some time to get ready for it, so it may not be as bad as everybody is viewing it now," concurred Banerjee. He also expects the regulatory pressure from federal health officials may go beyond Humana.
"Clearly, CMS is doing a lot more intensive audits on the (Medicare) plans," he explained, "So it wouldn't be surprising if there are changes to certain players' ratings going forward."
"They're raising the bar, in the sense that it is becoming increasingly demanding," to get the highest ratings on Medicare plans, said Dr. David Friend, managing director of consulting firm BDO's Center of Healthcare Excellence and Innovation. In other words, insurers are not getting worse, but rather facing tougher comparisons, he said.
"The good news is that the quality of everyone is improving, but [CMS] still wants to mark on a curve… so, by definition, not everyone can be a five-star," Friend explained.
Humana said it expects it will be able to mitigate the impact of the 2018 star reduction with plan changes and it intends to ask CMS to reconsider certain of the rankings.
Still, with Medicare plans playing an increasingly large role in the profitability of large health insurers like Humana, UnitedHealth Group and Aetna, the impact of star-ratings will weigh on investor sentiment. UnitedHealth and Aetna shares were also trading lower Wednesday.
"This will be a topic of discussion during third-quarter earnings," said Carroll.
It's not Humana's only dispute with federal regulators. The company's $33 billion acquisition by Aetna has been opposed by the Department of Justice's antitrust division. The antitrust case is set to go to trial in December.