Today, major health insurance companies such as UnitedHealth (UNH, Financial), Elevance Health (ELV, Financial), CVS Health (CVS, Financial), Centene (CNC, Financial), Humana (HUM, Financial), and Molina (MOH, Financial) experienced a decline after the Centers for Medicare & Medicaid Services (CMS) announced finalized payment rates for 2025 Medicare Advantage (MA) and Medicare Part D programs. The announcement came after market hours yesterday.
The market reacted negatively as the government's payment to MA plans is set to increase by an average of only 3.70%. This update aligns with earlier projections this year but falls short of the industry's expectations for a higher rate, especially considering the health insurance sector's lobbying for increased payments.
- Implications of the Lower-Than-Expected Rate: The government contracts with private insurers to provide Medicare benefits, compensating them per enrollee monthly. Health insurers count on these payments to manage MA program costs. A lower increase in government payouts means rising operational costs for insurers, potentially affecting their earnings.
- Different insurers will feel the impact of the unchanged 2025 rate to varying degrees. For instance, UNH highlighted in January that the anticipated reduction in MA funding significantly influenced its strategic planning for 2024 to 2026. Although UNH's MA segment isn't its most profitable, it's a fast-growing part of its business. Conversely, CNC, in February, voiced that the preliminary MA rates didn't align with escalating medical cost trends, identifying its MA segment as a crucial area for margin growth.
- The steady MA rate becomes more concerning against the backdrop of increasing care costs. A common trend among insurers in Q4 was a rise in the medical care ratio (MCR), indicating a higher percentage of premiums being allocated to cover claims. This surge partly stemmed from more outpatient care for seniors. HUM, for example, reported a near 200 basis points increase in its MA adjusted benefit ratio before its Q4 results, attributing it to higher-than-anticipated MA medical expenses.
In summary, despite the initial increase in the MA funding rate for 2025, the health insurance market had anticipated a more substantial hike. The government's decision to maintain the proposed rates has led to a significant downturn in health insurance stocks today. This development comes at a time when healthcare costs are escalating, making the unchanged MA rate a challenging outcome for insurers. This could lead to revised FY24 earnings projections. As most insurers are set to report Q1 earnings in the coming weeks, more details on the impact will likely emerge.
