Baird upgrades Humana to Outperform from Neutral

By Catherine Dunn Humana stock gained 14% in premarket trading Friday after the federal government released new ratings data on Medicare Advantage plans, showing that Humana achieved a four-star rating on a key contract closely watched by Wall Street. After a sharp fall two years ago, the insurer was looking to make a comeback on the new 2027 ratings, which were anticipated this week. The ratings are tied to financial bonuses in the Medicare Advantage program, and Humana's results were expected to test the stock that has soared about 50% this year. Humana made big strides Thursday, according to a Leerink Partners analysis of the latest data. "Bottom Line: HUM...is the clearest positive big winner in our 2027 Stars analysis," Leerink said in a client note. Leerink estimates that about 96% of Humana's members will be in plans rated four stars and higher for 2027, up from 42% this year, based on June enrollment figures. As seniors begin to shop for Medicare health coverage this month, the rating system is meant to help them compare the quality of plans, on a scale of one to five stars. For insurers and Wall Street, star ratings are an incredibly important metric because they determine quality bonus payments to insurers from the government. Plans rated four stars and above are eligible for the bonuses. This year alone, those bonus payments are expected to total more than $13 billion in aggregate. At Humana, "getting the quality bonus payment back on some of their large contracts is empirical to the margin recovery story," Leerink Partners analyst Whit Mayo told Barron's in an interview this week. "That's the primary investment thesis for investors." The challenge for Humana started two years ago, when the insurer saw a ratings drop, and went from having more than 90% of its members in a plan rated at least four stars, down to about 25%. At the time, Humana said it had narrowly missed thresholds on a small number of measures used to calculate stars. That reduction impacted Humana's ability to collect bonuses this year. When the 2026 ratings were announced last year, the results continued to show a gap between Humana and industry peers CVS Health and UnitedHealth Group, each with more than 80% of their members in plans with four or more stars this year, according to Leerink. On Thursday, both CVS Health and UnitedHealth Group saw some decline in that measure for 2027, with about 70% of each company's membership in a four-star or higher plan next year, Leerink found. A UnitedHealth spokesperson said the new star ratings "are in line with our expectations and reflect our continued investment in improving members' health outcomes." CVS Health's Aetna insurance arm, in a statement, said the results position the company as a high performer "for the third consecutive year and highlight strong performance across various clinical quality, preventive care and member experience measures." CVS shares were down 1.1% in premarket trading, while United