Stocks of UnitedHealth Group, CVS Health, and Humana Experience Declines Today

Stocks of UnitedHealth Group, CVS Health, and Humana Experience Declines Today

The federal agency that administers the Medicare program just approved a 3.7% payment rate increase. Here’s why that’s bad for insurance stocks.

Shares of several leading health insurance managed care stocks plunged today after the federally run Centers for Medicare and Medicaid Services (CMS) finalized a lower-than-expected 3.7% payment rate increase for the 2025 calendar year. When all was said and done at close of Tuesday’s trading, shares of Humana (HUM -13.41%) were down 13.4%, CVS Health (CVS -7.21%) had fallen 7.2%, and UnitedHealth Group (UNH -6.45%) plunged 6.4%.

Why some investors were surprised by this Medicare rate increase

In a press release late yesterday, the CMS — the federal agency operating within the U.S. Department of Health and Human Services that administers the Medicare program — announced that payments from the government to Medicare Advantage (MA) plans are expected to increase by 3.7% once they’re risk-adjusted to account for the health of covered customers. That equates to a more than $16 billion year-over-year increase in payments to MA plans for 2025. The federal government is projected to pay between $500 billion and $600 billion in Medicare Advantage payments to private health plans next year.

CMS is also finalizing changes to the structure of the Medicare Part D drug benefit for calendar year 2025, capping annual out-of-pocket costs at $2,000 for prescription drugs for people with Medicare Part D next year.

So why, exactly, is this bad news for health insurance managed care stocks? That 3.7% hike was in line with rates previously proposed by policymakers, after all.

But many industry watchers expected a larger rate hike to enable payments to better keep pace with rising medical costs. In the weeks leading up to last night’s announcement, insurance companies had widely balked at the proposal as inadequate, putting pressure on the Biden administration for a more pronounced increase in payment rates akin to 2022 and 2023.

“The funding level was broadly consistent with our expectation, which we do not believe is sufficient to cover current medical cost trends,” said CVS Health CEO Karen Lynch during the company’s quarterly earnings call in February.

Humana management has also previously argued that higher-than-expected medical costs have negatively impacted its earnings.

“It’s a big shortfall,” said Cantor Fitzgerald analyst Sarah James in a note to clients this morning. “This will come as a surprise.”

What’s next for shareholders of health insurance stocks?

Though CMS Administrator Chiquita Brooks-LaSure insisted their decision is aimed at “maintain[ing] the stability of the Medicare Advantage and Part D prescription drug programs,” insurance company spokespeople are already arguing the opposite.

Insurers generally receive more money from Medicare Advantage payments if enrollees have a larger number of documented health issues. The shift by the Biden administration to a risk-adjusted coding system starting last year was meant to prevent abuses of that system. Health insurers, for their part, insist the risk-adjusted system disproportionately affects senior enrollees’ benefits.

“These inadequate rates paid by the MA plans destabilize the financial health of provider organizations more broadly,” stated Katie Smith Sloan, CEO of aging services provider LeadingAge. “Policymakers must act before we find few providers remaining to serve the more than 65 million Medicare beneficiaries.”

More than half of all Medicare beneficiaries — around 33 million people — currently receive Medicare benefits via a Medicare Advantage plan.

According to estimates from banking company Stephens, “core” MA payment rates will actually decline by around 0.16% in 2025 after accounting for higher utilization trends expected in 2025. This is a “highly adverse outcome for the industry,” Stephens wrote in a research report this morning, marking “a continuation of the negative CMS rate cycle — now denoted as ‘Year 2’ — of a much more constrained annual MA reimbursement trend as compared to the significantly more favorable rate outcomes in 2022 and 2023.”

For perspective, the CMS previously increased the payment rate by 7.98% in 2022, 8.5% in 2023, and 3.32% in 2024.

In the end, however positive the CMS is in framing this 3.7% payment rate hike for MA plans, it’s clear that the market wants more. Facing the prospect of continued pressure on their results as medical costs and MA plan utilization continue to rise, it’s no surprise to see health insurance stocks falling broadly in response.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.

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