The US government confirmed on Monday that the rates for health insurers offering private Medicare Advantage plans will not change from the initial proposal made in January. The decision sent share prices of health insurance companies tumbling in premarket trading Tuesday.
Shares of UnitedHealth Group (NYSE:UNH) and CVS Health Corp. (NYSE:CVS) fell more than 4.4% and 5.5%, respectively, while Centene Corporation (NYSE:CNC) slipped 2.8%. Moreover, Humana (NYSE:HUM) stock dipped over 10% and Cigna Group (CI) slid 2%.
According to regulators, Medicare Advantage plans are set to receive a 3.7% average payment increase in 2025, the same rate increase the U.S. government proposed earlier in the year.
Insurance companies, which make billions of dollars selling private versions of the government coverage, had been hoping for a higher increase.
After adjusting for the estimated growth in patient risk scores, the payment update will effectively result in a 0.16% decrease.
This is a standard practice among companies and analysts who often exclude this factor for a clearer analysis of the annual payment policy. This year's rate update comes after months of vigorous lobbying efforts in Washington, drawing significant attention from investors keen on assessing the future performance of health insurers.
"This could put further incremental pressure on the multi-year effort to return to normalized margins that most plans are expecting, with many plans needing to reduce benefits up to the Total Beneficiary Cost (TBC) limit for 2025 bids," Oppenheimer analysts said.
"In our view, CI continues to be the best way to play the managed care industry in the near-term given its services focused model and the pending sale of its MA business," they added.
Meanwhile, Bank of America analysts downgraded HUM stock to Neutral following the news, saying they "now see the deteriorating rate environment becoming a risk to forward estimates, and as such we are also lowering our forecasts and price objective."
Their price target on Humana was cut to $342 from $470.