Humana has suffered a significant setback, losing a federal court battle challenging cuts to its Medicare Advantage (MA) star ratings. This ruling jeopardizes billions in bonus payments and adds to a growing list of legal and regulatory pressures, including disputes over risk adjustment audits and an emerging class-action lawsuit alleging AI-driven claims denials. For investors, these multi-faceted challenges signal increased scrutiny and potential headwinds for Humana’s profitability and long-term market position.
The landscape for major Medicare Advantage (MA) insurers is becoming increasingly complex, with regulatory scrutiny and legal challenges reaching new heights. At the forefront of this battle is Humana Inc., one of the largest MA organizations, which recently faced a critical defeat in its ongoing legal saga against the Centers for Medicare & Medicaid Services (CMS).
This latest ruling, reported by Benzinga.com, upheld the downgrade of Humana’s star ratings, directly impacting the lucrative bonus payments private insurers receive under the Medicare Advantage program. For investors eyeing the healthcare sector, understanding these intertwined legal and operational hurdles is crucial for assessing Humana‘s future financial trajectory.
The Star Ratings Saga: Billions at Stake
CMS Star Ratings are a cornerstone of the Medicare Advantage program, serving as a critical measure of plan quality. These ratings directly influence an insurer’s eligibility for quality bonus payments and significantly impact its ability to attract and retain members during the crucial open enrollment season. Higher ratings translate to greater rebates from CMS, which can be reinvested to offer more competitive benefits or flow directly to the bottom line.
Humana‘s recent lawsuit, a re-filing of a previously dismissed case, specifically challenged CMS‘s handling of three customer service phone calls. Humana argued that two calls were disconnected early due to third-party internet issues and a third was incorrectly categorized, leading to unfair penalties. Initially, a federal judge had dismissed Humana‘s first attempt to challenge its Medicare Advantage star ratings scores, citing that the company had not exhausted the administrative appeals process, as detailed in a court opinion (PDF).
The insurer contended that the data and calculations underlying the annual star ratings are “dizzyingly complex” and that CMS was not following its own regulations by failing to disclose all recalculation criteria. Humana even claimed it could not replicate 60% of CMS‘s cut point calculations, which are technical standards directly influencing scores. Despite these arguments, the Texas judge ruled in favor of the federal government, validating CMS‘s evaluation of the calls.
Impact on Humana’s Financial Health and Member Enrollment
This ruling carries significant financial weight. The consulting firm Capstone had estimated that approximately $3 billion in payments were at stake for Humana due to potential star ratings changes. The immediate consequence is a dramatic shift in Humana‘s 2025 ratings profile. For 2023, 94% of Humana‘s MA enrollees were in four-star plans or better. However, for 2025, only one-quarter of its members will be in similarly valued plans, largely because cut point thresholds—the metrics plans must meet—increased sharply.
While Humana‘s stock experienced a dip following the initial news of its challenges, the long-term implications are more profound. The ability to offer competitive plans and attract new members is heavily tied to these ratings, making the outcome a key factor in future growth and revenue. The challenge isn’t unique to Humana; UnitedHealth Group also sued CMS over a single customer service phone call, and other insurers like Elevance Health and SCAN Health Plan have successfully challenged CMS star ratings lawsuits in the past, whereas Florida Blue did not improve its scores after a similar challenge.
Navigating the RADV Audit Battlefield
Beyond star ratings, Humana is also locked in another significant legal battle concerning Risk Adjustment Data Validation (RADV) audits. On September 1, 2023, Humana filed suit in the U.S. District Court for the Northern District of Texas against the 2023 RADV Final Rule, which governs these audits in the Medicare Advantage program. This rule eliminated the Fee-For-Service Adjuster (FFSA), which previously limited audit recovery to account for documentation standard differences, and retroactively applied payments from 2018 forward.
Humana argues that the elimination of the FFSA introduces an inconsistent documentation standard, jeopardizing the predictability of the Medicare Advantage bid process and creating impermissible retroactive liability. The insurer asserts that its bids since 2012 were predicated on the existence of the FFSA. The Department of Justice (DOJ), in response, challenged Humana‘s standing, claiming no audits under the new rule had occurred. However, the Office of Inspector General (OIG) for the Department of Health and Human Services has already conducted multiple audits, including one on Humana subsidiary Care Plus Health Plan, applying the new methodology retroactively and assessing overpayments without the FFSA.
The outcome of this lawsuit will significantly influence how MA plans manage financial risk and bid for future contracts, potentially forcing them to estimate higher audit recoveries due to the retroactive application of a different audit methodology. This battle highlights the broader industry concern about the financial stability and predictability of the Medicare Advantage program, especially given estimates from the Medicare Payment and Advisory Commission (MedPAC) that MA could receive an additional $88 billion in overpayments in 2024 compared to traditional Medicare.
The Ethical Frontier: AI and Claims Denials
Adding another layer of regulatory and ethical complexity, Humana is facing a class-action lawsuit alleging that it used an Artificial Intelligence (AI) tool to deny medically necessary claims for Medicare Advantage beneficiaries. The complaint, filed in the U.S. District Court for the Western District of Kentucky, states that Humana continues to use NaviHealth‘s NH Predict AI model, despite allegedly knowing it is inaccurate and not based on individual patient medical needs.
The lawsuit claims that the AI algorithm predicted how much care an elderly patient should require, often overriding physicians’ determinations. Employees were reportedly disciplined or terminated if they deviated from the model’s projections. Plaintiffs argue that Humana financially benefits from these denials by collecting policy premiums without paying for obligated care and saving labor costs associated with manual claim reviews. This alleged misconduct forces elderly beneficiaries to pay out of pocket or forgo necessary care. Humana maintains that it uses “augmented intelligence” with “a human in the loop” and that coverage decisions are made with medical judgment and CMS guidelines. Interestingly, UnitedHealth Group faces a similar class-action complaint regarding the same AI model.
Investment Implications and Long-Term Outlook
For investors, Humana‘s multi-front legal and regulatory battles underscore the inherent risks in the highly regulated healthcare sector, particularly within Medicare Advantage. The recent loss in the star ratings case could lead to a significant reduction in quality bonus payments, impacting revenue and profitability in the coming years. This, coupled with the uncertainties surrounding RADV audits and the potential for substantial retroactive liabilities, paints a challenging picture for Humana‘s financial outlook.
The AI lawsuit, while distinct, adds to the narrative of intense scrutiny on payer practices. Allegations of using technology to unfairly deny claims could lead to reputational damage, significant legal costs, and potential regulatory fines. It also highlights an evolving ethical and operational challenge for insurers relying on AI for utilization management.
While Humana reported higher-than-expected medical costs and lower Medicare Advantage enrollment in recent updates, the company’s Q2 adjusted EPS of $6.27 did beat consensus. However, the long-term success of Humana—and indeed the entire Medicare Advantage industry—will depend on its ability to navigate these regulatory headwinds, adapt to changing CMS methodologies, and maintain trust with both beneficiaries and regulators. Investors should closely monitor the outcomes of these lawsuits, any further changes to CMS policies, and the broader market’s reaction to these evolving challenges to make informed decisions about Humana‘s stock.
