Key Takeaways
- Alignment Healthcare shares fell 20% after its California HMO contract, which serves about 75% of its health plan members, dropped to 3.5 stars from 4.0 in Medicare’s 2027 Star Ratings.
- Falling below 4 stars puts that contract’s 2028 quality bonus payments at risk just as Alignment’s earnings have turned positive.
- Alignment expects no revenue impact in 2026 or 2027 and plans to appeal and sue. JPMorgan and KeyBanc cut their price targets to $10 and $12.
- The next thing to watch is the third-quarter report, for how much provider risk-sharing offsets and whether William Blair’s cost-trend concerns show up.
Alignment Healthcare (ALHC) shares sank 20% in premarket trading this morning after Medicare’s 2027 Star Ratings cut the contract that serves about 75% of its health plan members to 3.5 stars from 4.0.
That half star matters…a lot more than you’d probably expect. Medicare pays quality bonuses to plans rated 4 stars or higher, and this one slipped under.
What exactly happened
CMS released the ratings after Thursday’s close. Alignment laid out the damage that evening in a release and an 8-K:
- Its California HMO contract H3815 earned a 3.5-Star Rating for 2027, down from 4.
- Its six other eligible contracts are at 4 stars or higher.
- Alignment expects no revenue impact in 2026 or 2027. The hit lands on 2028 quality bonus payments, and provider risk-sharing should offset part of it.
- It plans appeals and a lawsuit over CMS’s methods.
Dawn Maroney, president of Alignment Health and CEO of Alignment Health Plan, said: “We remain confident in our ability to deliver exceptional care and return our California HMO contract to at least a 4-Star Rating.”
Rivals went the other way. Humana (HUM) is up 17% after saying 95% of its Medicare Advantage members are in plans rated 4 stars or above for 2027. Clover Health (CLOV) is up 11% after its PPO plans earned 5 stars and its HMO plan earned 4.5.
Thin profits, big contract
The trouble is how thin profits still are. Normalized EPS went from a $0.26 loss in 2024 to $0.32 in 2025. The three analysts with a 2028 estimate expect $0.95 a share…
2028 is the year the lost bonuses land. KeyBanc has already cut its estimates, and I’d expect other analysts to follow until Alignment says how much risk-sharing covers.
The Street was already backing off
Even before Friday, the consensus price target had slid from $25.54 in May to $19.31 on Thursday…
Friday’s cuts go much further. JPMorgan went to $10 from $22 and KeyBanc to $12 from $28, and both kept Overweight ratings. William Blair downgraded the stock to Market Perform and expects the third quarter to show problems with cost trends.
Half a star, most of the business
For me, the sell-off makes sense. Alignment’s biggest contract fell out of bonus range just as earnings were turning, and that makes the 2028 estimate hard to trust.
Of course, a win on appeal or in court would put H3815 back at 4 stars. The third-quarter report will show whether William Blair’s cost worries are real.
So what is Alignment Healthcare stock actually worth?
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