What’s next for health insurers as Medicare finalizes 2025 Star Ratings?

With the Centers for Medicare & Medicaid Services (CMS) publishing 2025 Star Ratings for Medicare health and prescription drug plans on Thursday, attention now turns to their financial impact on health insurers.

Annually, CMS uses its Star Rating system to evaluate Medicare Advantage plans, the private versions of government-backed health insurance for seniors and people with disabilities.

In its review, the agency uses a five-star quality rating system that considers various factors, including member experience and cancer screening rates offered by health plans.

Its results published in October ahead of the annual enrollment period (AEP) can have a significant impact on the financial prospects of managed care firms, as Humana (NYSE:HUM) witnessed first-hand last week.

The Louisville, Kentucky, health insurer, the number two in the MA market, plunged to a 52-week low last week after announcing that members enrolled in top-rated MA plans for 2025 dropped sharply from a year ago.

Star Ratings can have a twofold impact on managed care organizations. On one hand, seniors tend to favor companies with higher-rated plans, impacting membership growth in the upcoming enrollment period.

Additionally, plans rated four stars and above are eligible for a 5% bonus payment from the CMS in the subsequent plan year, allowing companies to adjust plan benefits in line with funding levels.

“For HUM, the decline in 2025 Stars could have a very significant impact on 2026 earnings and likely push out the margin recovery story,” KeyBanc analyst Matthew Gillmor wrote in a research note on Thursday.

The company “may have less flexibility to adjust benefits in 2026 without risking significant enrollment loss, given the potential funding advantage of peers,” Gillmor explained, giving the stock a sector weight rating as part of the firm’s coverage initiation on healthcare services.

However, the analyst added that UnitedHealth (NYSE:UNH) can benefit from Humana’s (HUM) setback if the healthcare giant, which leads the MA market, can maintain a 60-80% range for 2025 stars compared to 79% in 2024.

“This may provide a meaningful advantage during 2025 AEP and for 2026 benefits,” Gillmor wrote, issuing an overweight recommendation and a $675 per share target on the stock.

Meanwhile, Alignment Healthcare (NASDAQ:ALHC), another MA player, received a sector-weight recommendation from KeyBanc due to multiple factors, including uncertainty over 2025 Star Ratings and the company’s upcoming Q3 results.

According to Gillmor, 2025 Star Ratings will not spare even those focused on value-based care. A novel healthcare delivery model, VBC links reimbursements to the quality of care, unlike historical billing or annual fee schedules seen in fee-for-service (FFS) models.

However, KeyBanc issued overweight recommendations and $23 and $35 price targets on leading VBC players Privia Health Group (NASDAQ:PRVA) and Evolent Health (EVH), citing, among other things, the industry’s recent selloff.