Humana (HUM) announced plans to discontinue more Medicare Advantage plans in 2027, impacting approximately 600,000 seniors, as part of a strategic overhaul to restore profitability . This decision, revealed during its second-quarter earnings call, came despite the health insurer beating Wall Street expectations on both earnings and revenue . The company's stock fell sharply as investors focused on a downgraded GAAP profit outlook and a decision to leave its adjusted earnings guidance unchanged, missing market expectations for an upgrade .

The 2027 Plan Exits: A Strategic Retreat for Margin Recovery

The planned exits represent the second consecutive year of downsizing for Humana, which had already reduced its Medicare Advantage footprint in 2026. This time, the insurer aims to shutter plans with lower capital returns to ensure it can keep benefits stable and retain members in more profitable plans . The move is a direct consequence of the company's laser focus on reaching its long-term margin targets . "Our No. 1 priority is to make the necessary progress to remain on track to deliver on our [2028] commitment of returning to a sustainable margin of at least 3%," CFO Celeste Mellet stated on the earnings call . The company expects to recapture about 240,000 (or 40%) of the affected members in other plans .

A Quarter of Contrasts: Beating Estimates, Missing Expectations

Humana's second-quarter results presented a mixed picture for investors. On one hand, the company reported adjusted earnings per share of $7.61, comfortably beating the $7.22 consensus estimate, and revenue of $40.87 billion, also exceeding expectations of $40.61 billion . The company's medical benefit ratio of 91.2% was in line with expectations, indicating medical cost trends were stable .

However, the market reaction was negative, with shares falling approximately 8-9% in premarket trading . This disappointment stemmed from two key factors: First, Humana maintained its full-year 2026 adjusted EPS guidance of "at least $9.00," rather than raising it as some competitors like UnitedHealth had done . Second, the company slashed its full-year GAAP EPS guidance to "at least $6.52" from the previous estimate of "at least $8.36" .

The Star Ratings Cloud: A $3.5 Billion Headwind

The primary driver of the disappointing outlook is a significant decline in Humana's Medicare Advantage Star Ratings . These ratings, which range from 1 to 5 stars, determine the level of quality bonus payments the insurer receives from the Centers for Medicare & Medicaid Services (CMS) . The company is facing a massive $3.5 billion "headwind" from lost bonus payments in 2026 due to a sharp drop in the percentage of its members enrolled in highly-rated plans .

In previous years, over 94% of Humana's members were in 4-star or higher plans. For the 2026 payment year, that figure plummeted to just 45% . This decline forced the company to issue conservative guidance at the start of the year, which it reaffirmed in the second quarter . The company is actively working to improve its ratings, but CEO Jim Rechtin acknowledged the uncertainty in predicting outcomes against industry thresholds .

Outlook: A Multi-Year Recovery Plan

Humana's strategy now focuses on a multi-year operational reset aimed at reaching a sustainable 3% margin by 2028 . This plan involves plan exits, member retention, benefit cuts, and other margin recovery factors . The path is critical as uncertainty also exists for 2028 regarding the Medicare Advantage rate update and potential risk model changes . The market is effectively viewing the stock as a "call option" on Humana regaining its Star Ratings, as Raymond James analysts noted .