US Health Insurance Stocks Tumble Following Final Medicare Payment Margin Squeeze

Health insurers in the United States saw their shares nosedive by 4% to 9% premarket trade on Tuesday following the failure of US regulators to raise payments for private Medicare plans as previously anticipated. The final 2025 reimbursement rates for Medicare Advantage (MA) payment suggested a cut which sparked worries over a margin squeeze. 

UnitedHealth saw its shares slump by 4.1%. CVS Health shares plunged by 5.3% while Humana, a Medicare-focused insurer, experienced the steepest fall at over 9%. Stocks of Centene Corp. and Elevance Health Inc. also shrunk in post-market trading following the announcement.

The squeeze on Medicare Advantage will put more pressure on margins on insurers already grappling with high medical costs. There is also a looming uncertainty surrounding insurance claims processing stemming from the hack at the tech unit of UnitedHealth.

Notwithstanding the pressure from industry groups and companies for the government to consider a late-year surge in healthcare demand, the rates indicated a 0.2% fall in average payments, unchanged from January’s proposal. 

As seen in Reuters, Jason Cassorla, a Citi analyst said, “[The] less-than-favorable rate updates, which coupled with the potentially clouded claims development in light of the Change Health cyberattack ... may put the once-golden Medicare Advantage market in somewhat less favorable standing”.

The Medicare Advantage program serves patients over 65 years old. The CMS payments to MA were expected to increase by 3.7% on average in 2025 based on the final notice published late Monday. Except for some items, the rate dropped by 0.16%, according to the estimates of some analysts.

Typically, the U.S. Centers for Medicare & Medicaid Services (CMS) raises the final reimbursement from the advanced notice. TD Cowen analysts published a note titled “Wish This Was April Fools” where they said that “the final rates were the brokerage’s worst-case scenario come true”. The proposal stipulates how much insurers can charge for monthly premiums, plan benefits they offer, and by extension their profits.

According to JPMorgan Securities analysts, only once in the last 10 years have the final rates not improved compared to the initial proposals. The decision by the President Biden-led administration to stick with proposed MA rates for 2025 is a deviation from recent practices that surprised Wall Street.

Insurance companies make hundreds of millions of dollars selling private versions of the government coverage, and the Monday announcement from CMS characterized it as a payment boost. The MA program has been driving growth and profits in the health insurance sector for many years. 

MA plans will be paid $16 billion more in 2025 compared to 2024, according to the agency. The cost of the program is expected to hit half a trillion dollars. The aim of the agency is “to maintain the stability of the Medicare Advantage” program explained CMS administrator Chiquita Brooks-LaSure and keep payments “up-to-date and accurate”.

Investors are watching the announcement closely to determine the prospects of the industry. According to Bloomberg Intelligence analyst Duane Wright, the absence of a significant increase “reinforces the challenging environment [for health insurers] and could signal continuing rate pressure in future cycles”.

If the payments are not increased, Humana will find it hard to meet the high-end of its goal to boost earnings by $6 to $10 a share in 2025 according to the company’s Chief Financial Officer Susan Diamond. The company has cut its guidance for the year. Last year the MA program paid $455 billion to private health insurers.