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Health Insurers Tumble as Final Medicare Advantage Rates Disappoint

(Bloomberg) -- The Medicare payment decision that rocked health insurer stocks Tuesday sets up a high-stakes election year gamble for the Biden administration as seniors could end up seeing cutbacks in their health plans right before Election Day.

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President Joe Biden’s administration held firm on proposed Medicare Advantage rates Monday, a break with recent practice that means health insurers are now facing lower payments than they’d anticipated for 2025. As a result, insurers may recalibrate the benefits they offer and the prices they charge for Medicare Advantage plans that cover 31.6 million seniors and people with disabilities. The 2025 plans will hit the market in October, just weeks before the presidential election.

Shares of some of the country’s largest health insurers like CVS Health and UnitedHealth plunged. Humana, which gets most of its revenue from Medicare, fell to its lowest point in four years.

There’s been rising concern in Washington about the cost of the Medicare Advantage program for years. The government paid private health insurers $455 billion last year to cover more than half of people on Medicare. The plans have faced intensifying scrutiny over costs and patients’ access to care.

Monday’s rate announcement follows a series of incremental changes — from new rules on marketing to changes in arcane billing systems — that have “holistically reformed” the Medicare Advantage program over the past three years, said Spencer Perlman, an analyst at policy researcher Veda Partners. While there was no single policy overhaul, the incremental changes add up.

“We’re starting to see that reflected in some of the stock prices,” he said in an interview Tuesday.

Companies selling Medicare Advantage plans will have to determine what their benefits and prices for 2025 will look like by June. They have “a lot of levers” to respond to the new rates, Perlman said, and may hesitate to raise prices or cut benefits because they could lose customers. “It’s a competitive environment,” he said.

Medicare Advantage plans are already under pressure. They’re seeing rising medical costs and demands from hospitals for higher payments, said Sachin Jain, chief executive officer of SCAN Health Plan, a California-based nonprofit Medicare insurer.

Given inflation, the 2025 rates amount to a cut in government funding, he said. National plans may decide to pull back from some markets where it’s costlier to operate. “It’s a real tightrope walk,” he said.

In the past, health insurers have threatened to cut benefits from their plans for seniors as a result of government funding limits but so far, that hasn’t materialized in a big way.

This time might be different. The Better Medicare Alliance industry group warned seniors may face disruption this fall. “Plans will have difficult choices” in designing benefits, said Don Dempsey, the group’s vice president of policy and research.

Shares Tank

Health insurance stocks plummeted Tuesday since investors were expecting more from the government, given recent history. Only once in the past 10 years have final rates not improved from regulators’ initial proposals, according to research from JPMorgan Securities analysts. The tougher stance signals another hurdle for insurers that already face faster-than-expected increases in medical costs.

Humana Inc. fell as much as 15% Tuesday while UnitedHealth Group Inc., the largest US health insurer, dropped as much as 8% and CVS Health Corp. declined as much as 9.6%. Cigna Group, which is getting out of the Medicare Advantage business, was only down 1.4% at its lowest point Tuesday.

Tightened Payments

US payments to Medicare Advantage plans will climb by 3.7% on average in 2025, the industry regulator announced Monday, the same increase that was proposed in January. This will represent a 0.16% decline after excluding an estimate of how plans code for patient illnesses, which can boost payments. Companies and analysts typically exclude that when analyzing the rates so the decline is the more important figure for investors.

Insurance companies make billions selling private versions of the government coverage, and the Monday announcement from the Centers for Medicare and Medicaid Services characterized it as a payment boost. Medicare Advantage plans will be paid $16 billion more in 2025 compared to 2024, the agency said, with the program’s cost expected to top half a trillion dollars. CMS administrator Chiquita Brooks-LaSure said the agency aims “to maintain the stability of the Medicare Advantage” program and keep payments “up-to-date and accurate.”

Medicare Advantage has driven growth and profits in the health insurance industry for years. But Biden’s administration has tightened some payment policies and moved to claw back billions in past overpayments. The annual rate update is always a contested policy, with insurers vying for more favorable treatment, and sometimes arguing that seniors will suffer benefit cuts without it.

The announcement is closely watched by investors. Wall Street had expected at least a 1% improvement from the preliminary rates, JPMorgan’s Lisa Gill wrote in a note to clients.

America’s Health Insurance Plans, an industry group, said the policy “will put even more pressure” on plans while the US is changing other policies that affect Medicare Advantage. Some companies had already called the proposed rates insufficient to cover rising medical costs that have clouded the outlook for the sector. Care expenses have outpaced expectations at UnitedHealth and Humana and alarmed investors.

Without a bigger increase in payments, Humana wouldn’t meet the high end of its goal to boost earnings by $6 to $10 a share in 2025, Chief Financial Officer Susan Diamond said at a conference in March. The company had already slashed its guidance for the year.

--With assistance from Subrat Patnaik and Matt Turner.

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