Health insurance stocks experienced a significant decline in premarket trading on Tuesday following the news that US regulators did not increase payments for private Medicare plans as expected by the industry. This decision by the Biden administration to hold firm on proposed Medicare Advantage rates for 2025 was unexpected and marked a departure from the usual practice of improving rates from initial proposals.
Industry analysts from JPMorgan Securities revealed that over the past decade, final rates have always improved from regulators’ initial proposals, except on one occasion. This tougher stance from the Biden administration, in the face of lobbying efforts, presents another challenge for insurers already dealing with faster-than-anticipated increases in medical costs.
The stock prices of major insurance companies were negatively impacted by this news. Humana Inc., which has the highest exposure to Medicare among large insurers, suffered a 9.2% decline in premarket trading. UnitedHealth Group Inc., the largest health insurer in the US, experienced a 4.3% drop, while CVS Health Corp. declined by 5.2%. Additionally, stocks of Elevance Health Inc. and Centene Corp. retreated in postmarket trading following the announcement.
The regulators announced that US payments to Medicare Advantage plans will only increase by an average of 3.7% in 2025, matching the proposed increase initially introduced in January. However, this represents a 0.16% decline when excluding estimated payments for patient illnesses. Insurance companies and analysts typically exclude these estimates when analyzing rates.
Medicare Advantage plans, which are private versions of government coverage, have been a driving force for growth and profits in the health insurance industry for years. However, the Biden administration has been implementing tighter payment policies and aiming to recover billions in past overpayments. The annual rate update is always a contested policy as insurers vie for more favorable treatment, often arguing that seniors will experience benefit cuts without it.
Investors closely watch the annual rate update announcement to gauge the industry’s prospects. The lack of a larger increase in Medicare Advantage payments reinforces the challenging environment for health insurers like Humana, UnitedHealth, and CVS. Analyst Duane Wright from Bloomberg Intelligence suggests that this might indicate continuing rate pressure in future cycles. He further explains that insurers might respond by scaling back benefits or raising premiums.
Industry groups, such as America’s Health Insurance Plans, have expressed concerns regarding the policy, stating that it will put additional pressure on plans while the US is making other changes that affect Medicare Advantage. Some companies have already deemed the proposed rates insufficient to cover rising medical costs, which have raised concerns among investors due to surpassing initial expectations at UnitedHealth and Humana.
Humana’s Chief Financial Officer, Susan Diamond, commented in March that without a larger increase in payments, the company would not meet its goal of boosting earnings by $6 to $10 per share in 2025. Consequently, Humana has reduced its guidance for the year. The Medicare Advantage program, which paid private health insurers $455 billion last year, now covers over half of the people on Medicare, with 31.6 million enrollees. However, these plans have faced growing scrutiny over costs and patients’ access to care.
While this article provides insights into the immediate impact of the Biden administration’s decision on health insurance stocks, it also raises questions regarding the potential future trends in this industry. The declining rates of Medicare Advantage payments reveal a challenging environment for insurers, especially as medical costs continue to rise unexpectedly.
Looking ahead, it is essential for insurers to assess their strategies in light of this development. They may need to consider adjusting benefits and premiums to maintain profitability, given the limitations on payment increases. It will be crucial for insurers to analyze trends in medical costs, projected changes in government policies, and factors influencing the demand for private Medicare plans.
Moreover, the scrutiny over Medicare Advantage plans’ costs and patients’ access to care highlights the importance of addressing these concerns to ensure the long-term viability and success of the industry. Insurers should focus on providing high-quality care at an affordable cost to meet the evolving needs of Medicare beneficiaries.
In conclusion, the unexpected decision by US regulators not to increase payments for private Medicare plans has had a significant impact on health insurance stocks. The implications of this decision highlight the challenges insurers face in a rapidly changing healthcare landscape. Adapting to emerging trends and addressing concerns related to costs and access to care will be crucial for insurers to navigate the future successfully.
