Humana Earnings Call: Growth Prospects Versus STARS Hit
Humana ((HUM)) has held its Q4 earnings call. Read on for the main highlights of the call.
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Humana’s latest earnings call struck a cautious but constructive tone as management balanced robust membership growth and operational progress with sizable near‑term financial headwinds. Executives highlighted strong 2025 EPS execution and improved member experience, yet repeatedly stressed that 2026 results will be constrained by a large STARS-driven revenue hit and uncertain Medicare Advantage funding.
Strong Membership Growth and Mix Quality
Humana reported a standout annual enrollment period, adding about 1,000,000 Medicare Advantage members, roughly 20% growth, and projecting around 25% individual MA growth for full‑year 2026. Management emphasized that more than 70% of new sales were switchers, about 30% were bounce‑backs, and over 75% came from higher lifetime value channels, a roughly 10‑point improvement year over year that should support better economics.
Retention Gains and Better Onboarding Metrics
Retention improved by more than 500 basis points versus last year, a critical driver of long‑term profitability. Early onboarding data showed fewer complaints to Medicare, higher transactional Net Promoter Scores, and stronger completion rates for health risk assessments, all of which enhance the member experience and support future STARS performance.
Solid 2025 Results and EPS Outperformance
For 2025, Humana delivered adjusted EPS of $17.14, essentially in line with expectations and above initial guidance of about $16.25. The insurance segment posted a full‑year benefit ratio of 90.4%, slightly better than guidance and signaling disciplined underwriting despite elevated investment spending.
Capital Efficiency and Strengthened Funding Position
Management underscored significant capital efficiency gains, projecting premium growth of roughly 40% from 2024 to 2026 while statutory capital requirements increase by less than 20%. Through capital optimization, the company expects to offset more than $3 billion of capital needs over the 2024–2026 period, keeping its debt‑to‑capital ratio broadly stable even as membership expands.
Operating Efficiency and Transformation Momentum
Humana expects a meaningful improvement in its consolidated operating cost ratio in 2026, driven by operating leverage from revenue growth and targeted cost actions. Initiatives such as supplier consolidation, an early retirement program, and increased outsourcing and automation are already underway, with management signaling that transformation benefits should accelerate further into 2027 and 2028.
CenterWell and Medicaid Emerging as Growth Engines
CenterWell, particularly its pharmacy business, is shifting from a drag to a tailwind, contributing positively after prior declines. At the same time, Humana’s Medicaid footprint has expanded to 13 states, including planned launches in Georgia and Texas, and management highlighted ongoing J‑curve improvement in Medicaid and CenterWell clinics as they scale.
Path to Long-Term Margin Targets Remains Intact
Despite near‑term pressure, executives reiterated their ambition to “unlock earnings potential by 2028,” anchored on materially higher individual MA margins. They expect individual MA pretax margin to double in 2026 when normalized for STARS outcomes, planning around a 75th percentile STARS performance over the long run, which they view as achievable with improved operations and benefit design.
Leadership Changes and Strategic Portfolio Moves
To sharpen execution, Humana appointed Aaron Martin as President of Medicare Advantage in January, adding seasoned leadership to its core business line. The company is also pursuing a strategic primary care acquisition and plans to fund selected small and mid‑sized deals through noncore asset sales, aiming to strengthen its care delivery capabilities without stressing the balance sheet.
Large STARS Headwind Weighing on 2026
A central theme was the roughly $3.5 billion net STARS headwind projected for 2026 across individual and group MA, even after contract diversification and provider offsets. Only about 45% of members are expected to be on four‑star or higher plans in 2026, while around 30% of new sales sit on sub‑four‑star contracts, increasing revenue risk and magnifying the impact of lower ratings.
Near-Term Medicare Advantage Margin Pressure
After incorporating the STARS drag, Humana expects individual MA margins to be slightly below breakeven in 2026, even though new members are described as enterprise‑accretive on average. This margin squeeze underpins a sharply lower 2026 adjusted EPS outlook and reflects management’s decision to absorb rating and funding pressure rather than overcorrect benefits in a single year.
Uncertainty From the Advance Rate Notice
The advance rate notice for Medicare Advantage came in below medical cost trend, injecting additional uncertainty into 2026 funding levels. Management acknowledged that final rates could force benefit and pricing adjustments, raising execution risk in product design and posing further pressure on margins until the funding picture clarifies.
Heavy 2025 Investments Tighten Near-Term Flexibility
Humana disclosed more than $550 million of incremental investment spending in 2025, with roughly 90% flowing through medical costs to support strategic transformation. While these investments are intended to improve competitiveness, operations, and STARS outcomes over time, they also limit short‑term earnings flexibility as the company absorbs both higher costs and lower 2026 profitability.
Operational Absorption and Capacity Risks
The rapid expansion of Humana’s membership base brings its own operational challenges, as the company must integrate a multi‑million member cohort without compromising service. Management highlighted capacity constraints as a key focus, noting that any missteps in care delivery or support could hurt STARS scores and exacerbate financial headwinds.
Reduced Offsets From STARS and Provider Support
Humana’s mitigation levers against STARS pressure are more limited this cycle because the company provided additional STAR‑related support to providers. As a result, contract diversification and provider offsets are running lower than usual, amplifying the net STARS headwind and leaving the firm more exposed relative to peers that retained more natural buffers.
Conservative 2026 Outlook and Shifted Seasonality
Management framed its 2026 guidance as deliberately conservative, reflecting the dynamic funding backdrop and sizeable STARS headwinds. They also warned that earnings seasonality will be more back‑half weighted, with impacts from STARS and policy changes expected to depress early‑year results before cost actions and transformation benefits pick up.
Forward-Looking Guidance and 2028 Ambitions
Humana guided to at least $9 in adjusted EPS for 2026, down sharply from $17.14 in 2025, while projecting roughly 25% growth in individual MA membership and continued retention gains. Looking further out, the company expects improved operating and admin expense ratios, a return to top‑quartile STARS by 2028, and stronger normalized MA margins as higher‑value members, CenterWell and Medicaid growth, and capital efficiency efforts compound.
Humana’s call presented a nuanced picture for investors, pairing near‑term earnings compression with clear signs of strategic and operational progress. The combination of strong membership growth, improved retention, and structural cost and capital actions suggests a credible path to higher earnings power, but the magnitude of the 2026 STARS and funding headwinds means patience will be required before that potential shows up in reported results.
