Shares in managed care insurers drop as Medicare Advantage payments fall short

Shares in US managed care insurers fell during the week of April 1 on news that government payments to companies that run Medicare Advantage programs will be lower than expected in 2025.

The Centers for Medicare and Medicaid Services (CMS) said in a press release April 1 that it established a 3.70% increase in payments in 2025 to insurers that run Medicare Advantage, an expanded version of government-subsidized healthcare available to seniors. The increase will also apply to Medicare Part D prescription drug programs — a voluntary outpatient prescription drug benefit for people with Medicare.

The final increase was 0.16% lower than the 3.86% rate that the CMS published in its advance notice Jan. 31.

The announcement sent the share prices of the leading Medicare Advantage providers down the following day, April 2. By the end of the day's trading, Humana Inc. was down 11.2% and Centene Corp. dipped 6.8%, while UnitedHealth Group Inc., Molina Healthcare Inc. and Elevance Health Inc. were off by 6.4%, 5.8% and 3.3%, respectively.

Investors had been expecting the final rate to be higher than the advance rate, which had been the case every year since 2021, said Piper Sandler analyst Jess Tassan.

"Investors were expecting something between a 50- and 125-basis-point [upward] revision to rates between the advanced notice and the final notice and they didn't get it," Tassan said in an interview.

There also was a negative reaction from Stephens analyst Scott Fidel, who lowered the price targets on the Medicare Advantage-levered companies he covers.

In a research note, Fidel said investors were looking for a 100-basis-point improvement over the advance, and the final rates represent a "worst-case scenario compared to most 'reasonably likely' possibilities" after the advance notice given at the end of January.

As of market close April 4, Humana's share price was down 10.6% for the week. Molina's stock fell 8.6%, Centene was down 8.2%, while UnitedHealth and Elevance were off by 7.9% and 3.8%, respectively.

Calculations off?

The main component in the final rate published by the CMS is based on the US per capita cost of fee-for-service spending for Medicare Advantage, Tassan said. Fee-for-service refers to how doctors and other healthcare providers are paid for each service rendered to patients.

The final rate is published after a 60-day comment period starting from the date of the advance rate notice. Providers share their fourth-quarter fee-for-service claims experience during that period, and for every year since 2017, the CMS has increased the growth rate for Medicare Advantage plans in the subsequent year, Tassan said.

Tassan said even though "every single one" of the public Medicare Advantage managed care organizations had an acceleration in cost trends in the 2023 fourth quarter, the CMS declined to provide an increase in the rate because it claimed the cost trend acceleration did not materialize in fee-for-service data.

The lower-than-expected rate increase could lead to "meaningful benefit reductions" in 2025, Jefferies analyst David Windley said in a research note. Windley said the "inadequate" rate limits the amount of margin expansion possible, with Centene and Humana possibly not reaching their Medicare Advantage margin expansion targets.

While it is still unclear as to how managed care organizations will price for 2025, UBS research analyst A.J. Rice said in a note that the lower growth rate "creates even more pressure to price for margin given the current elevated utilization environment and a weaker rate update."

The fallout from the CMS decision could include a decline in supplemental benefits in 2025, Tassan said, with plans paring back their offerings to offset lower rate benchmarks.

Supplemental benefits include everything traditional Medicare does not cover, such as pet sitting, transportation, over-the-counter medication allowance or home visitation services for seniors.