Health insurers fall as final Medicare Advantage rates disappoint

(Bloomberg) — Health insurance stocks fell sharply Monday in late trading after U.S. regulators did not increase payments for private Medicare plans as the industry had expected.

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The decision by President Joe Biden’s administration to keep proposed Medicare Advantage rates in place through 2025 marks a break with recent practice, taking Wall Street by surprise. Only once in the last 10 years have the final rates not improved from regulators’ initial proposals, according to research by analysts at JPMorgan Securities. The tougher stance on lobbying signals another setback for insurers already facing faster-than-expected increases in medical costs.

Humana Inc., which has the most exposure to Medicare among large insurance companies, fell 9.4% at 5:48 p.m. in extended New York trading. UnitedHealth Group Inc., the largest U.S. health insurer, fell 4.6%, while CVS Health Corp. fell by 5.2%. Elevance Health Inc. fell by 4.1% and Centene Corp. fell by 2.8%.

U.S. payments for Medicare Advantage plans will rise 3.7% on average in 2025, the industry regulator announced Monday, the same increase that was proposed in January. That would represent a 0.16% drop, after excluding an estimate of how plans codify patients’ illnesses, which could increase payments. Companies and analysts usually exclude this when analyzing rates.

Insurance companies make billions selling private versions of government coverage, and Monday’s announcement from the Centers for Medicare and Medicaid Services characterized it as a payment incentive. Medicare Advantage plans will pay $16 billion more in 2025 than last year, the agency said, with the cost of the program expected to reach half a trillion dollars. CMS Administrator Chiquita Brooks-LaSure said the agency aims to “maintain the stability of the Medicare Advantage program” and keep payments “up-to-date and accurate.”

Medicare Advantage has been driving growth and profits in the health insurance industry for years. But the Biden administration has tightened some payment policies and moved to roll back billions in previous overpayments. The annual rate update is always a contested policy, with insurers vying for more favorable treatment and sometimes arguing that seniors will suffer benefit cuts without it.

The announcement is closely watched by investors to gauge the industry’s prospects. The lack of more growth “reinforces the challenging environment” for health insurers such as Humana, UnitedHealth and CVS, “and could signal continued rate pressure in future cycles,” Bloomberg Intelligence analyst Duane wrote in a note Monday. Wright. He added that insurers, which must submit their proposed pricing and other plan details for 2025 to Medicare for approval by June, could reduce benefits or raise premiums in response.

Health Insurance Plans of America, an industry group, said the policy “will put even more pressure” on plans as the US changes other policies that affect Medicare Advantage. Some companies had already called the proposed tariffs insufficient to cover rising medical costs that have clouded the outlook for the sector. Care costs have exceeded expectations at UnitedHealth and Humana and alarmed investors.

Without a bigger payout increase, Humana would not meet its lofty goal of growing earnings by $6 to $10 a share by 2025, Chief Financial Officer Susan Diamond said at a conference in March. The company had already cut its guidance for the year.

The Medicare Advantage program paid private health insurers $455 billion last year, and the plans now cover 31.6 million people — more than half of the people on Medicare. But the plans have faced intense scrutiny over costs and patient access to care.

(Updates to include additional background and context)

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