Shares of Humana Inc. have largely shrugged off the recent settlement of a Medicare lawsuit, but the managed care giant is still feeling the effects of a rough second-quarter earnings season.
Humana, which contracts with Medicare to provide prescription drug plans, recently agreed to pay $90 million to the US federal government to settle a whistleblower lawsuit, according to a federal court filing.
In the wake of the settlement news, Humana's stock dipped 1.93%, falling from $357.23 a share on Aug. 15 to $350.36 a share on Aug. 16. The dip contrasted with the broader S&P 500 and S&P Insurance index, which on Aug. 15–16 rose 0.47% and 0.54%, respectively, to 5,554.25 and 432.88.
However, shares in the health insurer recovered some losses by the close of trading on Aug. 22 at $354.75 a share.
Filed under the False Claims Act, the lawsuit alleged that Humana submitted fraudulent bids to the Centers for Medicare & Medicaid Services for Medicare Part D prescription drug contracts from 2011–2017, significantly overcharging the US government.
'First of its kind'
This is the first case of its kind to resolve allegations of fraud in the Part D contracting process, per an Aug. 16 press release from the plaintiff's law firm Phillips & Cohen.
"We argued that Humana shirked its responsibility by telling the government that its plan would cover drug costs that Humana did not actually plan to cover," said Claire Sylvia, a Phillips & Cohen partner, following the settlement. "Our complaint detailed how the government and beneficiaries were left with paying tens of millions of dollars more than Congress intended for years, while Humana pocketed the money as 'savings.'"
The plaintiff, a former Humana actuary named Steven Scott, filed the lawsuit in 2016 and alleged that he discovered that Humana had accurately predicted internally each year the costs for its Part D "Walmart Plan," but based its government bids on different and unsupported assumptions.
The complaint alleged that every year Humana's internal assumptions proved accurate, its underlying bids were wildly off and always in Humana's favor, benefiting the insurance company by hundreds of millions of dollars.
Per Centers for Medicare & Medicaid Services rules, insurers are required to cover a minimum amount for prescription drugs under Part D, while the government covers the rest and the beneficiaries' out-of-pocket costs. The bidding process involves payers outlining what they plan to cover.
In a statement to S&P Global Market Intelligence, a Humana spokesperson said the company firmly believes that the actuarial assumptions in its prescription drug plan were reasonable and in full compliance with all laws and regulatory requirements and that the plaintiff's claims in the case are without merit.
"After a thorough investigation into the allegations, the US Department of Justice chose not to intervene in the case," the spokesperson said. "While we are confident in our position and expected to prevail at trial, we have made the decision to enter into a settlement agreement without admitting any wrongdoing to avoid the uncertainty, distraction, inconvenience and expense of a lengthy jury trial."
Rough Q2
While Humana's stock may have largely recovered following the settlement news, it is still trading down from before the release of second-quarter earnings.
Humana, which was hit particularly hard by a high medical loss ratio at 2023-end, continues to face cost pressures amid higher inpatient admissions and lowered its earnings per share projections for full year 2024 to $12.81 from $13.93. However, Humana raised its forecast for Medicare member growth to 4%. The company's second-quarter EPS dropped to $5.62 from $7.66 in the year-ago period.
Humana's shares dropped 10.6% from $404.52 a share July 30, the day before announcing its second-quarter earnings, to $361.61 on July 31. Humana's stock has dipped 24.5% year to date to $354.75 a share on Aug. 22, from $470.10 a share on Jan. 2.
The insurer's managed care rivals have fared better since July 30 however, with Elevance Health Inc. and Centene Corp. seeing modest 1.3% and 1.5% gains by close of Aug. 22 trading.
UnitedHealth Group Inc. remained largely unchanged, rising 0.4% during the same period, while The Cigna Group fell 1.8%, a smaller decline than the 12.3% drop by Humana since July 30.
Considering Humana's second-quarter earnings, J.P. Morgan analyst Lisa Gill rated the company "neutral," acknowledging the company's ongoing cost pressures.
"Higher-than-expected inpatient admissions are weighing on [second half of 2024] EPS and, more importantly, clouds visibility into the 2025 margin expansion/earnings growth story which is the core to the near-term bull thesis on Humana," Gill wrote. "Management noted a variety of potential offsets but it sounds as though the company is still experiencing a net headwind."